Cash Flow and Working Capital: Surviving High Inflation

If your income statement shows a profit but payroll week is a monthly crisis, this article is for you. It explains the cash conversion cycle, how to build a rolling 13-week cash budget, and which levers move liquidity fastest in Iran's inflationary environment.

Profit is not cash

Accrual accounting records revenue when it is earned. Sell on 90-day credit and the profit appears immediately; the money does not. In the meantime, salaries, rent, social security and tax obligations all settle in cash.

Company cash is trapped in three places: inventory, accounts receivable and prepayments. Those items less short-term liabilities are your working capital. Growth without controlling them is the classic route to insolvency — I have seen manufacturers in Kerman double their sales and fail precisely because of it.

The cash conversion cycle

Work it out in five steps:

1. Days inventory: average inventory ÷ cost of goods sold × 365.
2. Days receivable: average receivables ÷ credit sales × 365.
3. Days payable: average payables ÷ purchases × 365.
4. Add the first two, subtract the third.
5. Repeat for the prior year and compare the trend.

A typical trading company looks like this:

Each day removed from the cycle frees roughly one day of sales in cash. Cutting 25 days releases real money without a single rial of borrowing.

What inflation actually does

A large part of reported profit in a high-inflation economy is a holding gain: goods bought last year sell for more this year, but replacing them costs more too. Three consequences follow.

• You pay tax on that gain, because taxable income is built from historical-cost book figures.
• Working capital needs rise every purchasing cycle just to hold the same physical stock.
• Selling on interest-free credit is a hidden discount equal to inflation over the credit period.

For how these items connect to the balance sheet, see reading financial statements as a non-financial manager.

The 13-week cash budget

An annual budget supports planning; a weekly schedule supports survival. Build it as follows:

1. Open with all cash and near-cash balances.
2. List committed receipts — cheques in collection, invoices already due.
3. Keep probable receipts in a separate line, weighted for confidence.
4. Enter fixed payments: payroll, rent, insurance, loan instalments.
5. Add variable payments in priority order.
6. Place tax and social security deadlines in the correct week, not the correct month.
7. Compute closing balance and cash coverage in weeks.
8. Every Monday, compare last week to actuals and roll one week forward.

The value is early warning: a week-ten shortfall becomes visible in week one, when options still exist. The annual framework that feeds this schedule is covered in budgeting and financial forecasting.

Releasing cash from receivables

• Set a written credit limit per customer and lock it in the system so overrides need approval.
• Publish two prices — cash and term — so inflationary discounting becomes a deliberate decision.
• Call three days before the due date; it outperforms ten calls afterwards.
• Produce a monthly ageing report (under 30, 30–60, 60–90, over 90 days) and watch the over-90 share as a warning indicator.
• Keep contract, delivery note and invoice consistent. A receivable without delivery evidence is hard to collect and hard to defend in a tax audit.

Inventory and payables

Run a simple ABC analysis: roughly 20 per cent of items usually carry 80 per cent of warehouse value. Set reorder points for those and buy the rest against actual consumption. Convert slow-moving stock into cash with a discount — dormant goods are trapped money and an audit risk. A disciplined counting procedure keeps that decision honest.

On the payables side, negotiating terms from 30 to 60 days has exactly the same cash effect as cutting 30 days off collections, and is usually easier to obtain. Negotiate openly; do not achieve it by paying late.

Put tax deadlines in the cash calendar

For current rates and amounts, check the latest circular from the Iranian National Tax Administration. Mixing personal and company bank accounts destroys both cash control and audit defensibility — see bank transactions and tax scrutiny.

If you would like an outside review of your liquidity position and a calculation of your real cash cycle, I am glad to help.

Key takeaways

• Book profit does not measure survival; the cash conversion cycle and weekly cash coverage do.
• In inflation, part of reported profit only funds replacement cost and should not be distributed.
• A rolling 13-week cash budget exposes shortfalls weeks before they arrive.
• The largest recoverable cash pools are overdue receivables and slow-moving inventory.
• Treat tax and insurance deadlines as scheduled liabilities, not quarterly surprises.