Why can a profitable sale still need funding?
A credit customer can receive goods before paying. The sale may create revenue and a receivable immediately, while ingredients, packaging and wages have already used cash. Profit describes earned sales less recognized costs; it does not establish that the bank balance can cover the next payment.
Separate the physical event, the accounting event and the payment event. For a shipment, record what left stock, what consideration became earned and when the customer is expected to pay. Use the same transaction once in each relevant schedule, rather than counting the later collection as a second sale.
What does a simple monthly bridge look like?
Consider a hypothetical USD example, not a workbook result or an industry benchmark. April begins with $10,000 cash, no receivables, $2,000 stock and no payables. The business earns $20,000, collects $12,000, purchases $9,000 of stock, pays suppliers $7,000 and pays $6,000 of other operating costs.
If recognized product cost is $8,000, April ends with $8,000 receivables, $3,000 stock and $2,000 payables. Ending cash is $10,000 + $12,000 − $7,000 − $6,000 = $9,000. The simplified operating profit is $20,000 − $8,000 − $6,000 = $6,000, yet cash falls $1,000. This example omits tax, depreciation, assets, financing and other balances.
How can the profit and cash views reconcile?
The same simplified bridge is $6,000 profit − $8,000 increase in receivables − $1,000 increase in stock + $2,000 increase in payables = −$1,000 operating cash movement. The direct and indirect views agree because both use the same opening balances and transactions.
Avoid subtracting both purchases and recognized product cost from a direct cash forecast. Purchases establish the supplier obligation; payments reduce cash; recognized cost follows the goods sold or written off. Those are connected measures, not three separate cash expenses.
Which timing assumptions need operating evidence?
Use actual customer terms, expected collection behavior, supplier terms and stock policy. A single average-day assumption is an approximation: it may not represent overdue customers, deposits, irregular deliveries or several aged invoice cohorts. Explain what the chosen method can and cannot carry between months.
Re-test the cash floor when stock cover increases or customers pay later. Keep existing cash, financing receipts and owner withdrawals separate from sales. For a production example, see wholesale bread shipments, stock and credit; its inventory-cost convention and payment assumptions are specific to that saved case.
