PrintWorks: Profit but No Cash
Mpho owns a small printing business called PrintWorks. In March, she sold printing services worth P80,000. Of this, P50,000 was received in cash and P30,000 was on credit to schools that will pay in April. She paid P35,000 cash for paper, ink and other materials, and P12,000 for rent and electricity. She also bought a new printer for P40,000, paying P10,000 cash and agreeing to pay the balance over 12 months. At the start of March, she had P8,000 in the bank. During March she collected P10,000 from credit customers. At the end of March, she had P11,000 in the bank. Mpho says, 'I made a big profit, so why is there so little cash compared with that profit?' She wants to expand by hiring another worker and buying more paper on credit.
1. Calculate PrintWorks' profit for March and the movement in its bank balance. Explain why the two figures differ.
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Profit (accrual basis)
Sales P80,000 - materials P35,000 - rent and electricity P12,000 = P33,000.
The printer is a capital asset, not a normal monthly expense. Its cost is spread through depreciation over its useful life. If no depreciation figure is given, profit is P33,000.
Cash movement
Opening bank P8,000 + cash sales P50,000 + collections from credit customers P10,000 - materials P35,000 - rent and electricity P12,000 - printer deposit P10,000 = P11,000.
Movement = P11,000 - P8,000 = increase of P3,000.
Why they differ
Profit counts credit sales when they are earned, not when cash arrives. P20,000 of March sales is still owed by schools (P30,000 credit sales minus P10,000 collected). Cash also includes the P10,000 printer deposit, which is not an expense in the profit calculation. Profit is an accounting measure; cash is actual money available. A business can be profitable and still short of cash if customers pay late or if it buys assets.
2. Mpho wants to hire another worker and buy more paper on credit. Advise her, using the figures.
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PrintWorks is profitable but cash-tight. The bank balance is P11,000, yet P20,000 is owed by schools. Hiring a worker adds a recurring wage, and buying paper on credit adds creditors.
Before expanding, Mpho should:
- Collect receivables. Chase the P20,000 and offer a small early-payment discount only if it speeds up cash.
- Keep a cash buffer. Do not spend below one month's fixed costs of at least P12,000.
- Test the expansion. If the worker costs P5,000 a month and each extra job earns P2,000 contribution, she needs at least 2.5 extra jobs a month just to cover the wage.
- Negotiate supplier terms and avoid late-payment penalties.
- Use borrowing only for timing, not to cover losses.
Recommendation: delay hiring until at least P15,000 of the receivables is collected and she has three months of wage cover. Buy paper on credit only if the supplier terms are cheaper than the profit from the extra sales. Expansion should follow cash, not hope.
3. Explain two ways Mpho could improve her cash flow without borrowing.
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1. Tighten credit control. Invoice immediately, set 14-day terms for schools, charge interest on late payment, and follow up at seven days. This converts the P20,000 debtors into cash. The reasoning is that the sale is already made; the risk is collection. A discount for early payment may cost less than a bank overdraft.
2. Manage stock and suppliers. Order paper only when needed, negotiate 30-day supplier credit, and avoid bulk discounts that tie up cash. Stock sitting on a shelf is cash that cannot pay wages. She could also require a deposit on large printing jobs, lease the printer instead of buying, reduce owner's drawings, or sell unused equipment.
Borrowing should be a last resort because it adds interest and risk. Improving collection and stock control solves the timing problem without increasing debt.