Educational guide · Published October 2026 · Illustrative examples in Indian rupees
Profit is not the same as cash
Profit measures income after recognizing expenses under accounting rules. Cash flow tracks money actually received and paid. A business may record a sale and profit before the customer pays the invoice.
Illustrative trading example
During a month, an MSME records credit sales of ₹20 lakh and recognizes cost of goods sold of ₹14 lakh plus other expenses of ₹3 lakh. Its simplified accounting profit is ₹3 lakh before tax and any omitted charges.
But suppose it collects only ₹8 lakh from customers during the month and pays suppliers ₹10 lakh, wages and overheads ₹3 lakh, and term-loan principal ₹1 lakh. Net cash movement from these listed items is ₹8 − ₹10 − ₹3 − ₹1 = −₹6 lakh. This is an illustrative partial cash movement, not a full cash flow statement.
Three common reasons for the gap
- Receivables: credit sales raise reported revenue before cash collection.
- Inventory: purchasing or manufacturing stock consumes cash before sale.
- Principal repayments: loan principal uses cash but is not an expense in the profit and loss statement.
Cash conversion cycle
For example, inventory 50 days + receivables 45 days − payables 30 days = 65 days. This is a simplified operational indicator; seasonality and differing measurement bases can affect the result.
Why banks focus on cash flow
Debt servicing requires actual cash, not just reported profit. Credit appraisal therefore examines debtor realization, inventory conversion, supplier payments, tax obligations, capital expenditure and scheduled debt service. A borrower can report strong EBITDA while struggling to meet installments.
Practical cash management habits
- Prepare a rolling 13-week cash forecast and update it with actual collections.
- Review overdue receivables by customer and ageing bracket.
- Identify slow-moving inventory and avoid unnecessary purchases.
- Plan GST, payroll and debt installments before surplus cash is spent.
- Keep a separate view of operating cash flow and financing inflows.
Frequently asked questions
Can a loss-making company have positive cash flow?
Yes, for a period, for example if receivables are collected or inventory is reduced. That does not automatically make the business sustainable.
Is EBITDA the same as cash available for loan repayment?
No. Working capital movements, taxes, capital expenditure and other obligations can materially change available cash.
Official reference portals
For up-to-date rules and scheme details, refer to Reserve Bank of India, SIDBI and CGTMSE. These links are general reference portals, not endorsements of this article.