The business reports a healthy profit, but the bank balance keeps falling. How would you investigate and explain this to management?

What the interviewer wants to hear

• Prepares or reviews the cash flow statement, indirect method
• Checks working capital: receivables, inventory and payables
• Looks at capital expenditure and loan repayments
• Checks non-cash income and revenue recognition quality
• Considers tax, dividends and owner withdrawals
• Explains with a simple profit-to-cash bridge

Model answer

Profit and cash differ because of timing and non-operating items, so I would build a bridge from profit to the change in cash using the indirect cash flow method. First, working capital: rising receivables mean we are booking sales but not collecting, so I would check debtor days and the ageing for overdue or disputed customers. Growing inventory ties up cash, so I would check slow-moving stock. A fall in payables means we are paying suppliers faster. Second, investing and financing: capital expenditure, loan repayments, dividends or owner drawings all reduce cash without touching profit. Third, profit quality: large accrued income, unbilled revenue or non-cash gains can inflate profit. Tax and GST payments also matter. I would present management a one-page bridge showing profit, each adjustment and closing cash, with two or three actions, like tighter collections or an inventory reduction target.

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