Why your company is burning cash even when it shows a profit — and a practical step-by-step guide to stop it
You see profit on the P&L but the bank balance is dropping. That is a common, fixable problem. This guide gives a practical checklist and step-by-step actions you can take immediately to stop cash burn and restore healthy liquidity.
Quick reality check: profit ≠ cash
Profit is an accounting measure based on accruals (sales when earned, expenses when recognised). Cash is what’s actually in the bank. A company can report net profit but still use more cash than it collects because of timing differences, investing or financing decisions, or statutory payments. Prepare and read the cash flow statement every period — Companies are required to include a cash flow statement as part of financial statements.
Common, practical reasons profitable businesses burn cash
- Slow or ageing receivables (customers pay late).
- Inventory build-up — money tied up in stock awaiting sale.
- Large capital expenditure or prepayments (machines, deposits).
- High working-capital needs from rapid growth (sales booked but cash not yet received).
- Statutory outflows: GST, TDS, advance tax, payroll contributions (EPF/ESIC) and interest or principal on loans.
- Timing mismatch between when tax/returns are due and when cash arrives from customers.
- Poor pricing, discounts, or unplanned one-time payments.
- Payments to suppliers (including short payment terms for MSME suppliers) and penalties or interest for late statutory deposits.
Step-by-step practical guide to stop the cash burn (do these in order)
- Run a 13-week cash forecast this week: list opening cash, all expected receipts and all expected payments weekly for 13 weeks. Include payroll, tax payments (GST, TDS, advance tax), loan instalments, supplier payments, and committed capex.
- Reconcile and prioritise receipts:
- Pull an accounts-receivable ageing report and rank customers by days outstanding and amount.
- Contact top overdue customers this week and agree a payment plan — get it in writing.
- Consider short-term incentives for early payment (small, time‑bound discount) only if the incremental cash benefit exceeds the margin lost.
- Cut non-essential discretionary cash outflows for the forecast horizon: freeze hiring (unless revenue-critical), delay non-urgent capex, pause non-essential subscriptions and marketing until cash stabilises.
- Use statutory schedules to plan payments: map when GST, TDS and advance tax payments become due and make them top-priority in the cash forecast. Missing deposit deadlines can trigger interest and penalties — plan to keep cash for statutory outflows.
- Negotiate supplier terms: ask for extended payment terms or staged payments; offer faster payment in return for a small discount if you have surplus cash later. If you supply MSMEs, be aware the MSME framework addresses delayed payments and interest; conversely, if your customers are MSMEs, expect the 45‑day reference used in the MSME mechanism. Use the MSME Samadhaan route for contested delayed payments.
- Optimise inventory: implement just-in-time ordering, slow-stock review and clearance sales for obsolete items. Freeing inventory converts stock back to cash quickly.
- Consider short-term working-capital finance only as a stopgap: negotiate an overdraft, working-capital term loan or supply-chain finance with your bank. Use a borrow-and-pay approach tied to specific receivables rather than an open-ended increase in spending. RBI guidance on liquidity and ALM highlights the need to manage short-term mismatches carefully.
- Check payroll and statutory contributions timing: ensure EPF/ESIC and other payroll-related deposits are scheduled and funded before payroll runs to avoid late penalties and employee distress. Use the relevant portals and employer guidelines when planning payroll outflow.
- Use cash-preserving accounting measures correctly: accelerate invoicing, defer discretionary expenses, and capitalise where allowed. But do not manipulate recognition in ways that breach accounting or tax rules — use your auditor or tax advisor for compliant choices.
- Set short, medium and long cash targets:
- Short term (next 13 weeks): positive weekly closing balance.
- Medium term (next 12 months): working-capital runway (months of cover) target.
- Long term: policy on minimum cash buffer and contingency lines with a bank.
Practical checklist you can use now (tick as you go)
- Run a 13-week cash forecast this week.
- Generate AR ageing and contact top 10 overdue customers.
- Freeze non-critical spend for 30 days and review weekly.
- Map exact due dates for GST, TDS and advance tax for your company and reserve the cash.
- Review inventory and identify slow-moving SKUs for discount clearance.
- Speak to your banker about a short-term working-capital line tied to receivables (invoice discounting / OD).
- Confirm payroll statutory deposit dates and fund them ahead of payroll.
- Schedule a monthly cash review meeting with CEO/CFO/accounting lead.
What to keep ready before you call your accountant, bank or lawyer
- Latest bank statements (last 3 months), cash-book or bank ledger.
- 13-week cash forecast (simple Excel sheet).
- Receivables ageing (customer, invoice date, amount, days outstanding).
- Payables ageing and committed payments (taxes, salaries, loan EMIs, statutory deposits).
- Inventory report with slow-moving/obsolete items.
- Copies of major customer contracts showing payment terms.
- Loan documents with repayment schedule or sanction letters.
When professional review may be needed (act fast)
- Cash runway under 6 weeks — get a turnaround/finance specialist immediately.
- Major customer owes >25% of receivables or there is a disputed large invoice — get legal or MSME redress help. The MSME framework provides a mechanism for delayed payments and interest in certain cases.
- Repeated statutory deposit defaults or notices from tax authorities — consult a tax professional and address deposits before penalties increase.
- Bank covenant breach or looming loan default — speak to your bank relationship manager and legal counsel immediately.
Short glossary (plain English)
- Accrual profit: profit shown on P&L based on accounting rules; may include sales not yet collected.
- Cash flow: real cash movement into and out of bank accounts; tracked in the cash flow statement.
- Working capital: money needed to run day-to-day operations (receivables + inventory − payables).
General-information disclaimer
This is a practical guide for typical cash‑flow problems and does not replace tailored professional advice. For legal, accounting, tax or lending decisions specific to your company you should consult a qualified professional. Where the guide mentions statutory filing or deposit rules, you should confirm the exact dates, notifications or thresholds that apply to your case on the official government portals or with your tax advisor. Some timings and procedures are updated from time to time; check the official sources listed below before acting on a deadline.
Still to verify
- Exact filing and deposit due dates that apply to your legal entity for the current financial year (GST/GSTR frequency, TDS exceptions, advance tax instalments for your tax profile) — confirm on the official portals or with your tax advisor.
- Any company‑specific loan covenant wording or bank timelines for restructuring — check the loan agreement and speak to your banker.
- Whether any recent notifications specific to your sector or state have changed GST return due dates or procedural rules — check CBIC/GST portal notices.
Official sources checked
- Ministry of Corporate Affairs — The Companies Act, 2013 (financial statements and cash flow statement requirements)
- Reserve Bank of India — Guidance on liquidity management and ALM (Asset Liability Management)
- Income Tax Department — Rules/notifications on advance tax and related procedures
- TRACES / TDS FAQs — due dates and deposit rules for TDS
- CBIC (GST) — Rules on return filing and discharge of tax liabilities (GSTR-3B related provisions)
- Ministry of MSME — MSME Samadhaan and delayed payment provisions (Sections 15–24 of MSMED Act)