Most small businesses do not fail because they are unprofitable. They fail because on a particular Tuesday there is not enough money in the bank to pay the salaries, the supplier or the electricity bill, even though the books show a healthy profit. Anyone who has run a small unit will recognise the feeling: the order book is full, the invoices are raised, and the cash is somewhere else.
The gap between profit and cash has a name, the cash cycle, and it can be measured on one sheet of paper in about thirty minutes. This note walks through that sheet. It is written for the owner, the accountant and anyone who signs cheques, in a business turning over anything from a few lakh to a few crore a year. It needs no software beyond what you already use, and it will tell you something specific about your own business that a general article cannot.
What the cash cycle actually is
Think of cash as a bucket with a tap at the top and a drain at the bottom. You spend money to buy material or services. That material sits for some time as stock. It is converted into a product or a service and sold. The customer then takes some days to pay. Only when the payment arrives does the bucket refill. The number of days between the money leaving and the money returning is your cash cycle.
Three numbers describe it. The first is how many days, on average, your customers take to pay after you invoice them. The second is how many days your stock sits before it is sold or used. The third is how many days you take to pay your own suppliers. The cash cycle is the first plus the second, minus the third. A business that collects in sixty days, holds stock for thirty and pays suppliers in twenty has a cycle of seventy days: for seventy days of every rupee's journey, the business itself is the lender.
Seen this way, growth becomes a little frightening. Every extra order has to be funded for seventy days before it pays you back. A business that doubles its sales without shortening the cycle needs roughly double the working capital, and it is usually at exactly that moment that the bank balance gets thin. This is why a growing firm can run out of cash faster than a stagnant one.
The one-page sheet
Take a plain sheet and draw three boxes across the top. You will fill each from numbers you already have, using the last three months so that a single odd month does not mislead you.
In the first box, work out your collection days. Add up the money your customers owe you at the end of the period, divide it by the total credit sales in the period, and multiply by the number of days in the period. If you were owed three lakh rupees at the end of ninety days in which you sold twelve lakh on credit, your collection period is about twenty-three days. Do this for the business as a whole first, and then, if you can, for your five largest customers separately. The averages hide a great deal. In nearly every small business I have looked at, one or two customers account for most of the delay.
In the second box, work out your stock days. Divide the value of the stock you are holding by the cost of what you sold in the period, and multiply by the days in the period. A trading business will do this for goods. A service business will have little or no stock, and may write zero here, but it should add any work in progress: work that has been done and not yet invoiced is stock in everything but name.
In the third box, work out your payment days. Divide what you owe suppliers by what you bought from them in the period, and multiply by the days. Be honest here. If you are paying faster than you need to, because a supplier is a friend, that is a decision to make consciously rather than a habit to drift into. If you are paying slower than agreed, you are borrowing from a relationship, and the interest on that loan is paid in trust.
A worked example, and why it is a composite
The following is not a real firm. It is a composite built from several small manufacturers and traders I have seen over the years, with the numbers changed so that no one can be identified.
Imagine a small packaging unit with a turnover of about two crore rupees a year. Its books show a comfortable profit. Its owner, whom I will call Mr. R., tells me that he is constantly short of money and does not understand why. We fill the three boxes. His customers take sixty-two days to pay, though he quotes thirty. His stock of paper and board sits for twenty-eight days. He pays his suppliers in fourteen days, because the largest one once refused him credit for a week and he has never forgotten it. His cash cycle is therefore seventy-six days.
The sheet shows him three things at once. First, his quoted terms are fiction: the real collection period is double what he promises on the invoice. Second, he has no leverage in the other direction, because he pays so quickly. Third, he is funding roughly two and a half months of his own sales from his own pocket, or from an overdraft whose cost never appears in the profit figure he is so proud of.
None of this required a consultant. It required one sheet and an hour of honest arithmetic.
Four levers, in the order they usually work
Once you have the three numbers, there are only four things you can do, and they are best tried in a particular order.
The first lever is collection, and it is almost always the cheapest. Most late payment is not hostility. It is the customer's accounts team working through a pile in the order of whoever reminds them. Send the invoice on the day of delivery, not at month end. Put the due date and your bank details in the first line. Telephone, politely, two days before the due date, not two weeks after it. Name one person in your office who owns this task, and let them be pleasant and persistent. Businesses that do these four small things typically shorten their collection period within a quarter, without a single argument.
The second lever is the terms you offer. If a customer is habitually late, you can quote shorter terms to them, ask for a part-payment in advance on large orders, or offer a small discount for early payment. The discount looks expensive until you compare it with what you pay the bank for the same days. A two per cent discount for payment ten days early works out to a far higher annual cost than most overdrafts, so use it sparingly and only for customers who will really take it up, but do not dismiss it.
The third lever is stock. Most small firms carry stock out of fear: fear of a missed order, fear of a price rise, fear of a supplier who delivers late. Look at the items that moved least in the last three months. The money sitting in them is idle. Some stock is a sensible insurance, and some is simply the residue of old decisions. Separate the two on one line of the sheet, and do not buy more of the second kind.
The fourth lever is your own payment timing, and it comes last on purpose. Stretching suppliers is the easiest lever to pull and the most damaging to overuse. The sensible approach is to pay on the agreed date, neither earlier nor later, and to use the agreed terms in full. Paying a week early without a discount in return is simply a gift of your cash to someone else's bucket.
The weekly habit that gives you six weeks of warning
The sheet above tells you where you stand. To see a crunch coming, you need a second, smaller habit: a rolling view of the next six weeks, drawn up once a week and kept on a single page.
Write the weeks across the top. Underneath, list the money you expect to receive each week, naming the customer and the invoice, and the money you are committed to pay out, naming the salary, the rent, the loan instalment, the statutory dues and the supplier payments. At the bottom, write the balance you expect at the end of each week. It takes fifteen minutes on a Monday once you have done it twice.
The first time you do this you will probably find a week, perhaps four weeks ahead, in which the balance goes below zero or very close to it. That is the whole point. A shortfall you can see a month away is a problem with several solutions: you can chase a particular invoice, defer a purchase, arrange a short bank facility while your standing is good, or speak to a supplier early and courteously. A shortfall you discover on the morning of the payment has only one solution, which is an expensive one.
Be conservative when you estimate receipts. Use the real collection days from your first box, not the days you hope for. If a customer usually pays in sixty-two days, put the money in week nine, not week five. Optimism in the receipts column is the most common reason these sheets fail to warn people in time.
What to do with the bank
The sheet is also the best document you can carry into a conversation with a banker. A lender wants to know, in the end, how reliably you convert sales into cash and how much working capital the business needs at its current size. If you can show your cash cycle, your six-week view and the steps you are taking to shorten the first, you are speaking the lender's own language, and you will usually be treated as a careful borrower rather than a hopeful one.
Ask for credit before you need it, in a size that matches the gap on your sheet, and no larger. A facility sized to the real need is cheaper and easier to defend than a large one taken in a panic.
A thought from the old books
The Gita speaks of the person who acts without being swayed by the fruits, and it is often misread as an instruction to ignore results. I read it differently when I look at small firms. The discipline it describes is attention to the action itself: doing the small necessary thing, at the proper time, carefully. Raising the invoice on the day of delivery, telephoning before the due date, writing the sheet on Monday morning are exactly such actions. They are unglamorous, they are within your control, and they decide what the results will be.
Where to begin
You do not need to do all of this at once. This week, do three things. Fill the three boxes using the last ninety days. Find the two customers who delay you most and decide what you will say to each. And draw up the six-week page, even roughly, and look at the lowest balance on it.
If you would like more practical notes of this kind, you will find them on the blog index. If there is a particular cash problem in your own unit that you would like me to write about, tell me, and I will consider it for a future note.
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Book a Free Strategy CallPublished 21 October 2026 · dibyenduchoudhury.com
