RM20 Million in Revenue. Why Is the Company Still Short of Cash?

“We did RM20 million in business last year and the books show a profit. So why are we still on the overdraft at the end of every month?”

I hear this from business owners more than anything else. The answer usually isn't whether business is good. It is where the money is stuck. The income statement tells you how much you made; the cash flow statement tells you where the money went. Many owners only read the first one.

Four places the money gets stuck

1. Receivables: the sale is made, the cash hasn't arrived. Take an illustrative company with RM20 million in annual revenue, about RM54,800 a day. If customers take 90 days on average to pay, roughly RM4.9 million is money you have earned but not yet collected.

2. Inventory: the cash has turned into stock. Say the company's annual cost of sales is RM15 million and it holds 60 days of stock. That is about RM2.5 million sitting in the warehouse.

3. Supplier credit: the one item working in your favour. With 30-day terms from suppliers, they are effectively funding about RM1.2 million for you.

Put the three together:

Illustration: RM4.9m (receivables) + RM2.5m (inventory) − RM1.2m (payables) ≈ RM6.2 million tied up in the operating cycle.

The company is profitable on paper and has over six million ringgit locked in its operating cycle. A tight month-end is no surprise.

4. Payments that don't show up in the income statement. Some money leaves the business for real but is invisible in the profit figure, or appears at a different amount:

• Loan principal: the income statement records interest only, not the principal you repay each month;
• Capital spending on machinery, renovation or vehicles: paid upfront, expensed gradually through depreciation;
• Tax instalments: companies pay estimated tax in monthly instalments (CP204), so the cash goes out in advance;
• Director withdrawals and dividends: what the owner takes out of the company is a cash outflow too.

The better business gets, the shorter cash can be

This is the least intuitive part. When revenue grows 20%, receivables and inventory usually grow with it, and the increase has to be funded first. If the illustrative company grows from RM20 million to RM24 million on the same terms, the operating cycle could absorb more than another million ringgit of cash.

A fast-growing company needs to plan its cash earlier, not discover the gap at month-end.

Where to start

Every company is different. These are the areas I usually look at with business owners, not a fixed formula:

• Collections: check whether your largest customers actually pay later than their contract terms. Cutting receivable days from 90 to 60 would free about RM1.6 million for the illustrative company;
• Inventory: identify the slowest-moving category;
• Supplier terms: see whether there is room to negotiate without straining the relationship;
• Large payments: whether capital spending and loan schedules can be timed away from your collection low points;
• A 13-week cash forecast: seeing which week a gap will appear is far calmer than asking the bank for a facility when it arrives.

These steps also decide a second question: how much of the company's cash is genuinely idle. Many owners think there is spare money in the account, then find, once the operating cycle is counted, that it is needed next quarter. Read: Your company has RM1 million. Why not put it all in an FD? →

If this sounds familiar

If your revenue is growing but cash is always tighter than you expect, we can lay out your operating cycle and the next 13 weeks of cash together. Accounting treatment and tax we confirm with your accountant and tax agent.

More questions? Read: Corporate cash management, 15 questions business owners ask most →

Registered Financial Planner (RFP) · JMarc
This article is general financial education. The company and all figures are illustrative. It is not investment, tax, accounting or legal advice.