R² SignalsCash Flow & Liquidity
The group is profitable. Why is cash still tight?
Profitable entities do not necessarily leave the group with cash available where it is needed. Intercompany balances, debt commitments and restrictions can change what leadership can use—and when.
Executive Cut
Profit measures performance. A bank balance shows cash held. Neither, by itself, establishes what a particular entity can commit next.
At a glance
- The decision
- Can we approve the next hires?
- Relevant setting
- A group with several legal entities.
The accounts show a profitable quarter. You want to approve two new hires. Before you can, finance needs to work out which entity can pay, what is already committed and when the cash will arrive. You have a clear picture of the quarter behind you. The commitment in front of you is harder to see.
When the answer comes back slowly, or with conditions attached, the accounts are not necessarily wrong. Finance may be answering a different question from the one you need resolved.
Three numbers that sound like one
Three figures can be treated as if they say the same thing.
- Profit
- Whether activity over a period earned more than it cost. Recorded when revenue is earned and costs are incurred, not when money moves.
- Cash balance
- How much money sits in the group’s bank accounts on a given day, added together.
- Available cash
- How much a particular entity can use, for a particular purpose, on a particular date, after what is already promised.
The hiring decision depends on the third figure. The financial statements and bank balances show the first two.
Cash can be present—and unavailable
When cash feels tight, the first instinct may be to chase receivables. Sometimes that is the answer. In a group with several entities, four other possibilities deserve a look.
The cash is held by an entity that cannot fund this commitment
Cash held by one entity is not automatically available for another entity’s commitments. If the operating company is making the hires and the cash sits in a property company, a transfer may need more than a bank instruction. Before relying on one, establish the applicable agreements, approvals, accounting treatment and any legal or tax considerations.
The cash is restricted
Some balances are held for a defined purpose: a reserve required by a lender, deposits held for tenants or customers, escrow for a project. A bank balance alone does not show which amounts are available for the proposed use.
The cash is already committed
Loan agreements can require minimum balances, set aside money for upcoming payments or restrict distributions until certain tests are met. Cash that looks available may already be spoken for.
The cash arrives after the bill
Profit earned this quarter may be collected next quarter, while payroll, rent and debt service fall due every few weeks. New hires add to payroll from their first month. A group can be profitable over the year and still short in a particular week.
Illustrative situation
A group has one operating company and two property companies. The operating company is growing and needs cash to hire. Both property companies are profitable. One holds a reserve its lender requires; the other has a loan payment due in three weeks. The consolidated balance looks comfortable. The cash the operating company can actually use this month is a fraction of it.
Our judgment
An unusual funding decision may reasonably require extra analysis. But if routine hiring decisions repeatedly require finance to reconstruct available cash, leadership needs a more dependable way to see what it can commit.
One delayed answer does not establish a control failure. We would read the situation differently if finance already produces available cash by entity, after commitments, on a regular cycle, and the delay came from something genuinely new, such as a refinancing or the first commitment of a new entity.
Before the next funding decision
Start by putting the existing records side by side.
- Cash by entity and by account. The bank balances for each legal entity, not only the consolidated total.
- Amounts already spoken for. Lender reserves, deposits held for others, escrow and covenant terms such as minimum liquidity or limits on distributions and transfers.
- Intercompany balances. Which entity owes which, for how long and on what terms; whether settling them is allowed and whether both sides agree.
- The commitment calendar. Payroll, debt service, tax payments, rent and project payments over the next few months, by entity and date.
- Profit beside operating cash flow. Examine receivables, inventory, prepayments and payables; then separately consider capital spending, debt principal repayments and distributions.
Several of these factors may be present together. Putting them side by side also shows whether the answer can be produced the same way next time.
The question to bring to the next discussion
Which cash is available, in which entity, after which commitments, and on what date?