BUSI 3016 Week 4 Profit to Cash Flow Narrative Example

$90,000 of Summer Profit, $15,000 of Operating Cash and a $60,000 Draw on the Line of Credit: A Cash Flow Narrative Following One Family Heating and Air Business Through June, July and August 2027

Student Name

Walden University

BUSI 3016: Finance Essentials Workplace Certificate

Instructor Name

Month Day, Year

$90,000 of Summer Profit, $15,000 of Operating Cash and a $60,000 Draw on the Line of Credit: A Cash Flow Narrative Following One Family Heating and Air Business Through June, July and August 2027

The Puzzle

For the composite Springfield furnace and air company studied this term, June through August is both the busiest and the most profitable stretch. In 2027 the summer quarter earned $90,000 of net income. Yet by the end of August the owner had drawn $60,000 on the company's line of credit, and the bank balance was barely higher than in May. This narrative follows the quarter's money from net income down to what actually reached the bank, to show where the profit went.

From Net Income to Operating Cash

Table 1

Summer Quarter Operating Cash, June 1 to August 31, 2027

Composite company and figures.

Where the Profit Went

Depreciation comes first and goes the other way. The income statement subtracted $16,000 for the wear on vans and equipment, but no check was written for it in the summer, so it is added back.

Receivables took the largest bite. In the summer, the company replaced equipment at forty apartments for two property management firms, billed on forty-five-day terms. Those jobs counted as revenue when they were finished, but much of the money had not arrived by August 31. Receivables grew by $58,000, which is profit the company had earned but not yet collected.

Inventory took the next bite. In July, the main equipment supplier announced a price increase for September as manufacturers moved to new refrigerants. The owner bought twelve extra condensing units in August at the old price. The decision may save money in the fall, but it turned $34,000 of cash into equipment sitting in the warehouse.

Payables helped a little. The company owed suppliers $9,000 more at the end of August than at the start, which kept that cash in the bank for now.

Deferred maintenance revenue worked against cash. Customers pay for maintenance plans in advance, mostly in the spring. In the summer, technicians performed many of the cooling tune-ups those customers had already paid for. That work counted as revenue, but the cash had arrived months earlier, so $8,000 of summer profit brought no summer cash.

Taken together, $90,000 of profit became $15,000 of cash from operations.

The Rest of the Quarter's Cash

Table 2

Investing and Financing, Summer Quarter 2027

Composite figures.

The van down payment was planned. The tax distributions were not optional: because the company is an S corporation, its owners pay income tax on its profit personally, and the company distributes cash so they can make quarterly estimated payments. Those payments are based on profit, not cash, so a profitable quarter with little cash still produces a tax bill. The line of credit filled the gap. After all of it, the bank balance rose by only $8,000.

Why the Same Pattern Repeats Every Summer

This was not an unusual quarter. Every summer, the company does its most work, bills its largest commercial jobs and carries the most inventory, all of which tie up cash at the same moment. Every summer, tune-ups paid for in the spring are performed, which adds profit without adding cash. And every quarter the owners need tax distributions based on profit. The result is a predictable squeeze that peaks in August and eases in the fall, when commercial customers pay and inventory is used. Treating it as a yearly pattern means the owner can approach the bank in spring rather than August and size the credit line to the expected gap, about $60,000 in 2027, with room for a hotter summer.

What the Owner Can Take From This

Three of the gaps were choices, and each can be managed. The forty-five-day terms for property managers could become thirty days or come with a deposit. The early equipment purchase was a reasonable bet on prices, but it should be weighed against the interest on the line of credit that financed it. And tax distributions can be planned for, since they track profit predictably.

Higgins et al. (2023) describe how growing firms can be profitable and still short of cash, because growth ties up money in receivables and inventory before it returns. Deloof (2003) found that firms with longer collection and inventory periods tended to earn less, which suggests the summer's slower cash was not only a timing problem but a cost. Churchill and Mullins (2001) made the same point for small, fast-growing companies: the speed at which cash cycles through the business can limit how fast it can afford to grow without borrowing.

References

Churchill, N. C., & Mullins, J. W. (2001). How fast can your company afford to grow? Harvard Business Review, 79(5), 135-143.

Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3-4), 573-588. https://doi.org/10.1111/1468-5957.00008

Higgins, R. C., Koski, J. L., & Mitton, T. (2023). Analysis for financial management (13th ed.). McGraw Hill.