Case Study: Cash Leakage Diagnostic for a Promoter-Run Trading Business
Tracing the gap between reported profit and actual cash across inventory, receivables, advances and operating outflows
Executive Mandate Summary
Key Transaction & Governance Challenges
- •The business reported approximately Rs 28 lakh of net profit, yet year-end bank cash was only Rs 3.4 lakh. Management lacked a transaction-level explanation for the widening gap
- •The Tally inventory register showed stock that could not be physically located in the godowns. Damaged, pilfered and informally dispatched inventory had not been appropriately reconciled.
- •Rs 11.3 lakh of receivables were more than 180 days old, including Rs 6.8 lakh assessed as practically irrecoverable, with no corresponding provision.
- •Rs 3.8 lakh of personal expenditure had passed through the business bank account over 18 months, making operating cash generation harder to assess.
Northrop Execution Architecture & Methodology
Executive Mandate Overview
The business was generating revenue and reporting profit, but the cash position continued to deteriorate. At approximately Rs 6 crore of annual turnover, the company reported net profit of around Rs 28 lakh while maintaining only Rs 3.4 lakh of bank cash at year-end.
The central question was not whether the business was profitable. It was where the cash was going.
Northrop conducted a 23-day cash leakage diagnostic covering 18 months of transaction data, bank statements, inventory records, receivables and operating payments.
The engagement identified Rs 35.7 lakh of leakage across five major categories and resulted in a seven-control framework designed specifically for the scale and operating structure of the business.
The Cash-Flow Problem
The business operated across two godowns, employed 14 people, carried approximately Rs 1.2 crore of inventory and extended credit to around 60 customers.
The promoter personally managed procurement, customer relationships and banking. The accountant maintained Tally, completed GST-related work and prepared information required for the annual return.
The accounting system was sufficient for statutory and compliance purposes. It was not sufficient to answer the management question:
Why is reported profit not converting into available cash?
The divergence had accumulated over approximately three years without a structured cash-flow diagnostic.
Reconstructing the Cash Flow
Northrop exported and reconciled 18 months of Tally data against bank statements.
Every material payment and receipt was classified into:
- Operating expenditure
- Procurement
- Salaries
- Rent and utilities
- Financing
- Loan repayments
- Interest
- Asset purchases
- Promoter drawings and personal expenses
- Unclassified transactions
The unclassified category totalled Rs 14.2 lakh over 18 months.
This provided the starting point for transaction-level investigation.
Where the Cash Was Leaking
Inventory Shrinkage
Physical verification identified Rs 8.7 lakh of inventory that existed in the books but could not be located in the godowns.
The variance included damaged inventory that had been disposed of without appropriate write-offs, suspected pilferage and goods dispatched without formal invoicing.
Aged Receivables
Rs 11.3 lakh of receivables were more than 180 days old.
Of this, Rs 6.8 lakh was assessed as practically irrecoverable because customers had closed, relocated or disputed the balances.
Unrecorded Discounts
Spot discounts offered by the promoter to larger customers were not governed by a formal authorisation process.
The aggregate value was approximately Rs 4.1 lakh during the year.
Personal Expenses
Rs 3.8 lakh of payments over 18 months related to personal expenditure routed through the business account.
Advance Leakage
Rs 2.1 lakh of advances to transporters and casual labour remained unsettled or unrecovered.
Together, these categories demonstrated that the cash leakage was distributed across multiple operational processes rather than originating from one isolated transaction.
Verifiable Institutional Outcomes & Value Realized
- Identified leakage across inventory shrinkage, aged receivables, unrecorded discounts, personal expenses and unrecovered advances.
- Mapped each identified leakage category to its value, transaction source and underlying control weakness.
- Established practical controls covering inventory reconciliation, receivable ageing, discount authorisation, advance settlement, expense segregation, bank reconciliation and monthly cash-flow reporting.
- Six months after implementation, average monthly cash surplus increased from approximately Rs 28,000 to Rs 1.4 lakh.
Ashish Chaudhary
Facing a Similar High-Stakes Transaction or Turnaround?
Northrop partners execute buy-side due diligence, fraud forensics, and financial restructuring with strict board confidentiality and unmatched technical rigor across Indian jurisdictions.
Case Study: Ghost Trainees and Unverified Placements in a Skill Development NGO
A skill development NGO reported that 1,200 youth had been trained and 840 placed in jobs under a programme funded through a ₹1.4 crore CSR contribution. The reported 70% placement rate prompted an independent review of beneficiary records, training delivery, placement claims and programme expenditure. Northrop Management Private Limited conducted a forensic verification covering beneficiary deduplication, attendance records, direct beneficiary calls, employer confirmations, offer letters, salary claims and the underlying financial trail.
View Full Mandate RecordNeed Guidance on Management Consulting?
Northrop senior partners advise boards, funds, and corporate leadership on high-stakes transactions, forensic audits, and regulatory compliance.