Social science shelf · Class 11
Can a busy stall run out of cash?
Dadi's stall made a profit of ₹22,000 this month. So why can she not pay the milkman?
What you will learn: Tell sales, profit, receivables and cash apart, and explain how a business that makes a profit can still run out of cash.
What should I know first?
If this feels new, try this first. It is fine to go back.
- The first profitable ticket Class 10
Small test at the end: scroll down to the end of this page for five short questions that check what you have learnt. Tap an answer, then press Check answer. Go to the questions ↓
Jump to: Check yourself · For grown-ups · For teachers
Safety first
Use the made-up numbers here. Never use your family's real money records.
Keep it safe:
- Use the made-up figures on this page. Do not use or share a family's real income, bills or bank details.
- This is a learning model, not financial advice.
- If you use play money or counters to act it out, keep them away from babies: nothing goes in the mouth.
You will need
- Paper and a pencilFor the two views of the month.
- A calculator (optional)For the totals.
- Play notes or slips of paper (optional)To act out cash coming in and going out.
Time: About 45 minutes.
What do you think?
Dadi's stall made ₹22,000 profit this month. Tanmay says she must have ₹22,000 more cash than at the start. Is he right?
Make a prediction and write one reason for it. Then tap the guess closest to yours to see how to test it. It is fine to change your mind after checking.
Yes, profit is cash
Look at the office orders. Has that money arrived yet?
No, not yet
Which money has arrived, and which money has gone out? Add up only the cash and check.
She made a loss
Did she? Add up everything she earned and everything she spent this month.
Not sure
That is fine. List the money that came in as cash this month, and the money that went out.
Need a hint?
Make two lists: money earned this month, and money actually received this month.
The story
Dadi's chai is so popular that three offices nearby order every day. They pay at the end of next month. Dadi buys more milk, tea and sugar, and the supplier wants cash on delivery. At the end of the month Tara adds it up: "You made ₹22,000 profit!" Then the milkman comes, and the cash box is empty. "How can we be rich and broke at the same time?" asks Tanmay.
The idea
Sales are what the business sold. Profit is sales minus the costs of making those sales, for the same period.
In this model all ₹50,000 of supplies were used up this month (no stock left over), and other costs such as wages and tax are left out.
Cash flow is the money that actually comes in and goes out, and when.
When customers pay later, the money owed is a receivable. When the business pays later, it is a payable.
A business can be profitable and still run out of cash if it pays its bills before its customers pay it. Managing that gap is called working capital.
Worked example
How short is Dadi?
Dadi started the month with ₹15,000 cash. How much more money does she need to pay all these bills?
- Cash in: only the cash sales, ₹20,000.
- Cash out: supplies ₹50,000 and rent ₹8,000, so ₹58,000.
- 15,000 + 20,000 − 58,000 = −23,000: she is ₹23,000 short.
She needs ₹23,000 more, from a loan, her own savings or by paying some bills late, even though she made a ₹22,000 profit. The offices' ₹60,000 arrives next month.
Try it
List the month.
Write every item from the story: office orders, cash sales, supplies and rent.
Profit view.
Add what was earned this month, and subtract the costs of making those sales (here, the supplies used and the rent). That is the profit.
Cash view.
Now count only money that actually moved this month. Start from ₹15,000 cash.
Find the gap.
Explain in one sentence why the two views differ.
Fix the gap.
Try four fixes: faster payment from offices, later payment to the supplier, fewer credit orders, a short loan. What does each do to profit and to cash?
Make a plan.
Choose the fix you would try first, and say what could go wrong with it.
What you make (paper or offline)
Your cash plan
Make a cash plan for a made-up small business with customers who pay late.
Show its profit and its cash for one month.
Choose a fix and say what it changes and what it risks.
Make it on paper. Keep it with you. Nothing to upload.
What did we find out?
Read this after you have tried it. Look back at your guess and your reason first.
Profit counts what was earned this month: 60,000 + 20,000 − 50,000 − 8,000 = ₹22,000.
Cash counts what actually came in and went out: 20,000 − 50,000 − 8,000 = −₹38,000. She started with ₹15,000, so she needs ₹23,000 more to pay every bill. Without it, some bills stay unpaid.
The ₹60,000 the offices owe is a receivable: money owed to the business. It is real, but it cannot pay the milkman today.
Check yourself
Five questions about what this page teaches. Choose an answer and press Check answer, or open "See the answer and why". Nothing is saved or sent: your choices stay on this screen and disappear when you leave or reload the page.
How do you want to answer? You choose, and you can change at any time.
See the answer and why
- A. ₹80,000 Not this one. That is her sales, before any costs.
- B. ₹22,000 Correct. 60,000 + 20,000 − 50,000 − 8,000 = 22,000.
- C. ₹30,000 Not this one. That leaves out the ₹8,000 rent.
- D. −₹38,000 Not this one. That is the change in her cash, not her profit.
See the answer and why
- A. ₹38,000 more Not this one. That forgets the ₹15,000 she started with.
- B. None: she still has ₹15,000 Not this one. Cash came in and went out; it did not stay the same.
- C. ₹23,000 more Correct. 15,000 + 20,000 − 50,000 − 8,000 = −23,000, so she is ₹23,000 short.
- D. None: she has ₹37,000 in hand Not this one. That counts the offices' ₹60,000 as if it had already arrived.
See the answer and why
- A. It has too many customers Not this one. More customers alone does not explain it, though more credit sales can widen the gap between paying suppliers and being paid.
- B. It pays its bills before its customers pay it Correct. Profit counts sales when they are made, even before the customer pays; cash counts only money that has actually come in. The gap is timing.
- C. Profit is counted only after tax Not this one. Tax matters, but it does not explain an empty cash box this month.
- D. Its profit is always made up Not this one. The profit is real; the money has simply not arrived yet.
See the answer and why
- A. Pay the supplier earlier than now Not this one. She already pays on delivery. Paying even sooner cannot help.
- B. Work out the profit again Not this one. The profit was right. Counting it again does not bring in cash.
- C. Take even more credit orders Not this one. More credit sales mean more supplies paid now and more money arriving later.
- D. The offices agree to pay within 7 days Correct. If they agree and pay sooner, with no discount or charge, the money owed arrives without lowering profit.
See the answer and why
- A. Her profit for the month Not this one. Profit is sales minus costs, not money owed.
- B. A payable Not this one. A payable is money the business owes to others, like a supplier.
- C. A receivable Correct. Money owed to a business by its customers.
- D. Her capital in the business Not this one. Owner's capital is the owner's own money put in; a loan is borrowing. Neither is money a customer owes.
Think back
Why is "profit" not the same as "money in the box"?
Which fix would you try first, and what could go wrong?
Investigate further
- Make a cash table for the next three months. Choose and label your own assumptions: sales, costs, when the offices pay, and how the first shortfall is paid for. When does Dadi's cash recover?
- Find out what "credit period" or "payment terms" mean on a real (blank) invoice template.
Can you use it here?
A tuition teacher is paid by families at the end of each term but pays room rent every month. When might she run short?
Ask someone at home
Ask someone at home who runs or works in a business: do customers pay at once or later? What happens when they pay late?
No one free to join in? That's fine. You can do it by yourself with drawings, and ask a grown-up to help with the materials.
For grown-upsTap a heading to open it. The safety notes are at the top of the page.
Before you start
- Paper and a calculator. Keep play money and counters away from babies; nothing in the mouth.
- Use the made-up figures. Please do not share real family income or bank details.
Questions that help
- "Has that money arrived yet?"
- "Earned, or received?"
- "Which fix helps cash without hurting profit?"
What's really going on
Many small businesses that close are profitable on paper but run out of cash. This activity shows why.
Accountants record sales when they are made, not when they are paid (accrual). Cash flow tracks the money itself.
This is a simple model for learning. Real business decisions also involve tax, loans and contracts, and need professional advice.
Other ways to do it
- Act it out with play money: one box for cash, one for IOUs.
- Use a school canteen or a festival stall instead.
For teachersLearning aims, classroom ideas and what to look for.
Learning aims
- Distinguish sales, profit, receivables and cash.
- Explain how timing creates a cash shortage in a profitable business.
- Evaluate ways to manage working capital.
Subject links
- Accountancy and business studies: accrual and cash, receivables and payables (confirm with your board's syllabus).
- Class 10 "The first profitable ticket" (profit and break-even).
- Class 10 "Simple and compound interest, and an EMI" (the cost of a loan).
These links are general. They have not been checked against a specific board syllabus.
In the classroom
- Groups run a three-month cash table for a made-up business and present when it runs short.
- Debate: should a small stall ever sell on credit?
What to look for
- Separates "earned" from "received".
- Includes the opening cash.
- Weighs a fix against what it risks.