Free tool
Profit-to-cash calculator
A profitable year can still end with less cash than it started. Adjust sales, margins and the three working-capital days to see where the profit goes, and how fast the business can grow on its own money.
From profit to cash
This year, NPR
- Net profit for the year+NPR 60.0 lakh
- Less: more owed by customers−NPR 56.9 lakh
- Less: more stock on hand−NPR 59.2 lakh
- Add: more credit from suppliers+NPR 14.8 lakh
- Cash from operations−NPR 41.3 lakh
- Cash conversion cycle
- 180 days
- Cash tied up in working capital
- 4.39 crore
- Growth profit can fund
- 16% a year
The business makes NPR 60.0 lakh of profit, but growth absorbs NPR 1.01 crore into customer balances and stock. Cash from operations is −NPR 41.3 lakh: the profit is real, the cash is not there.
At these settings, profit alone can fund about 16% growth a year. Faster than that, the difference has to be borrowed or invested.
Illustrative. Assumes balances move in line with sales and that profit is kept in the business. Leaves out tax timing, depreciation, capital spending and loan repayments, which a real cash forecast includes.
Method
How the figures are worked out.
The example is a distributor with NPR 10 crore of sales growing 30% a year. It earns NPR 60.0 lakh of profit, yet operations consume NPR 41.3 lakh of cash, because customers pay in 90 days and stock sits for 120 days while suppliers are paid in 30.
| Line | Calculation |
|---|---|
| Last year's sales | This year's sales ÷ (1 + growth) |
| Cost of sales | Sales × (1 − gross margin) |
| More owed by customers | Increase in sales × debtor days ÷ 365 |
| More stock on hand | Increase in cost of sales × stock days ÷ 365 |
| More credit from suppliers | Increase in cost of sales × creditor days ÷ 365 |
| Cash from operations | Net profit − customers − stock + suppliers |
| Cash conversion cycle | Debtor days + stock days − creditor days |
| Growth profit can fund | The growth rate at which net profit equals the extra working capital |
The model assumes balances move in line with sales and that profit stays in the business. It leaves out tax payment timing, depreciation, capital spending, dividends and loan repayments. A cash forecast for a real business includes all of them, month by month.
If the numbers look like yours, the fix is usually in terms, stock and pricing before it is in borrowing.
Book a free callWhere people go from here