Profit Fell 15%. Cash Ended $340,000 Below Plan. Here's Why.

Sales are steady. The factory is profitable.

Our illustrative manufacturer earns $2 million in annual operating profit on $10 million of revenue. It imports part of its materials by sea, spending $200,000 annually on freight. Sea transit takes six weeks, and suppliers allow four weeks to pay after shipment.

Then shipping rates multiply by two and a half, and the goods that took six weeks at sea now take ten.

All figures in this piece are illustrative, in US dollars, at constant volume and selling prices, before implementation costs.

What the P&L sees

Annual freight goes from $200,000 to $500,000. Annual operating profit goes from $2.0 million to $1.7 million. Down 15%. The annualized operating-profit impact is immediately visible: the freight line went up, the profit line came down.

The P&L, however, is only half the story.

What the cash forecast sees

Four extra weeks at sea means four extra weeks of inventory in transit. The company also decides to carry two additional weeks of safety stock. Together, these changes create six extra weeks of inventory coverage to finance. Supplier credit delays the payments but does not remove them: by week ten, about $265,000 of additional cash has gone out to pay for inventory that is still on the water or in the warehouse. By week thirteen, cash is $340,000 below the original plan.

The $265,000 and the $340,000 are different measures. The first is the extra inventory funding paid out by week ten. The second is where the closing cash balance sits at week thirteen against the forecast made before the shock, after the higher freight bills and the extra stock.

These amounts cannot be compared directly with annual profit. Buying inventory uses cash, while its cost generally reaches the P&L when the finished products are sold. Higher freight costs affect both inventory valuation and, eventually, cost of sales. That timing difference is why cash pressure can appear before the full earnings impact is recognized.

The distinction matters because a company can meet its sales targets and still accumulate less cash than planned. In this example, the business starts with $300,000 in cash. By week thirteen, it has $460,000 under the freight-shock scenario. That is not a cash collapse. But without the shock, the same forecast would have reached $800,000. The $340,000 difference represents cash no longer available for other priorities. A CFO needs to understand both the absolute bank balance and the deterioration against the original plan.

With $300,000 of opening cash, the company stays above its $250,000 minimum-liquidity policy throughout the forecast. Its lowest weekly closing balance is $323,000 in week one. Cash then rises before coming under renewed pressure from inventory payments in weeks five to ten, reaching a local trough of $362,000 in week ten. If opening cash were below approximately $227,000, the minimum reserve could be breached, assuming all other cash flows remained unchanged. The lesson is to assess the entire 13-week cash path, not just the final balance, and arrange credit headroom where the forecast shows it is necessary.

Three decisions, two numbers each

A finance team that models the shock instead of reporting it would put three options on the table, each with an annual profit figure and a thirteen-week cash figure. They do not rank the same way.

Absorb the cost: annual profit $1.70 million, week-thirteen cash $340,000 below plan.

Add a two-percent freight surcharge: annual profit improves to $1.90 million. But surcharged invoices only start converting to cash late in the quarter, so just $19,000 of extra cash arrives by week thirteen. The gap narrows to $321,000.

Switch forty percent of imports to a closer supplier: annual profit reaches $1.82 million, lower than the surcharge because the nearer supplier costs more per unit. Under the modeled assumptions, the closer supplier's shorter lead time reduces inventory funding requirements. The week-thirteen cash gap narrows to $231,000, giving near-sourcing the strongest cash outcome of the three options before implementation costs.

These decisions also operate on different timelines. The surcharge improves annualized earnings, but the model assumes revised prices begin in week three and additional collections arrive only from week nine. By week thirteen, the company has collected just $19,000 of the surcharge benefit. Near-sourcing offers a different advantage: reducing the capital tied up in a longer supply route. Neither answer is automatically right. The appropriate choice depends on the liquidity buffer, supplier terms and the company's tolerance for implementation risk.

The surcharge delivers the highest annual profit. Near-sourcing protects the most cash this quarter. Each optimizes a different objective.

What I would ask my finance team Monday morning

1. If our main sea lane doubled in cost and took four weeks longer, what happens to annual profit, and what happens to the 13-week cash forecast, week by week?
2. What is our lowest cash point in the next thirteen weeks, which payments cause it, and how far is it from the minimum balance we have promised the bank or ourselves?
3. Which decision are we optimising for right now: annual profit or near-term cash? Do we have the credit headroom to choose the first without being forced into the second?

The point of the exercise

The freight bill damages profit. The extra weeks of inventory put cash under pressure first. A business that only reads the P&L will see the smaller problem and miss the earlier one. When the world changes, the forecast should move before the decision is made.

The value of FP&A is not simply reporting what the shock cost. It is showing management when cash comes under pressure, which assumptions matter, and which decision the business can afford to make.