Why is this profitable quarter short of cash?
Reconcile operating profit to cash before accepting more generous customer terms.
The question
Hafen Tools, a fictional German distributor, prepares its quarterly cash plan. Values are EUR thousands. Working-capital changes exclude cash and debt. No dividend, financing flow or asset disposal is included.
| Value | |
|---|---|
| Opening cash | 80 |
| EBIT | 120 |
| Depreciation in EBIT | 20 |
| Increase in receivables | 90 |
| Increase in inventory | 70 |
| Increase in payables | 30 |
| Cash interest | 10 |
| Cash tax | 20 |
| Capital expenditure | 60 |
| Required closing cash buffer | 40 |
Invented figures. All values are EUR thousands.
“Why is this profitable quarter short of cash?”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Start from profit without double counting
What would you do here? Open the move you’d make.
Use EBIT as cash available for investment.
Tempting, but it misses something. It omits both non-cash charges and working-capital timing.
Add back depreciation once, then bridge the cash movements.
The strong move. This follows the difference between profit and cash.
Add depreciation back to both EBIT and EBITDA.
Tempting, but it misses something. That counts the same adjustment twice.
See how a strong candidate says it
“Add EUR20,000 depreciation back to EUR120,000 EBIT, then account for working capital, cash interest and tax.”
Why it works: Depreciation reduced profit but is not this quarter’s cash payment.
Step 2: Reconcile closing cash
What would you do here? Open the move you’d make.
Treat the EUR30,000 payable increase as a cash outflow.
Tempting, but it misses something. An increase in unpaid supplier balances is a source in this bridge.
Stop at the positive EUR140,000 EBITDA.
Tempting, but it misses something. That is before working capital, interest, tax and capex.
Build the full bridge and compare closing cash with the buffer.
The strong move. The business is profitable but its plan does not fund the required cash balance.
See how a strong candidate says it
“Operating cash is minus EUR20,000. After EUR60,000 capex, free cash movement is minus EUR80,000. Opening cash of EUR80,000 falls to zero, leaving a EUR40,000 buffer gap.”
Why it works: Inventory and receivables absorb cash; payables partly fund them.
Step 3: Choose a funded plan
What would you do here? Open the move you’d make.
Agree specific cash actions with amounts, dates and accountable owners.
The strong move. This can close the measured gap.
Assume the bank will cover the gap if needed.
Tempting, but it misses something. No facility is committed in the facts.
Stop all supplier payments without checking the effects.
Tempting, but it misses something. That could break supply and does not establish a viable plan.
See how a strong candidate says it
“Quantify collections, stock action, staged capex or committed funding. Confirm the operational and supplier effects before promising the plan.”
Why it works: An unsigned facility or a hoped-for collection is not available cash.
Step 4: Price the revised customer terms
Revised customer terms tie up another EUR50,000 in receivables. All other cash inputs remain unchanged.
What would you do here? Open the move you’d make.
Count a customer deposit as immediate extra revenue.
Tempting, but it misses something. A deposit supplies cash but may remain a liability before delivery.
Reopen the terms and funding plan around the EUR90,000 gap.
The strong move. This includes the new use of cash and the minimum balance.
Keep the original EUR40,000 funding request unchanged.
Tempting, but it misses something. It leaves the new receivable requirement unfunded.
See how a strong candidate says it
“Another EUR50,000 tied up in receivables takes closing cash to minus EUR50,000 and the buffer gap to EUR90,000. Fund or restructure the terms before accepting them.”
Why it works: A sales concession can consume cash without changing reported profit immediately.
The answer, in short
- Decision
- Fund or restructure the customer terms before committing.
- Because
- The revised cash gap is EUR90,000 despite positive EBIT.
- What would change it
- Binding funding, collection dates, stock needs or deferrable spending change the cash bridge.
Common traps
- Equating EBITDA with cash in the bank.
- Counting an unsigned facility as available cash.
Check your answer
- Which expenses were non-cash?
- Which working-capital changes use cash?
- What is the required buffer?
- Are the proposed cash actions committed?
Last reviewed Nov 10, 2026