The India Subsidiary Hemorrhaging Cash

The Situation

A $50M US software company with a 200-person India development center. On paper, India operations were "profitable": the P&L showed a 25% EBITDA margin. But corporate kept sending cash. Every quarter, another $500K-800K wire transfer to fund payroll and operations.

The India GM insisted operations were profitable. The US CFO saw the bank statements and knew they weren't. This had been going on for 18 months. No one could explain the disconnect.

What Most Would Do

Dive into the India books looking for accounting errors. Review every GL entry. Demand reconciliations. Assume someone is stealing or the India accountant is incompetent.

The Unfolding Values Analysis

This isn't an accounting problem. This is a systems problem.

Ran a 3-day diagnostic:

• Day 1: Cash flow statement reconstruction. Where did $4.8M actually go in the last 12 months?
• Day 2: Working capital analysis. What's consuming cash operationally?
• Day 3: Incentive analysis. Who benefits from a "profitable" P&L vs. who owns cash management?

Found the root cause in 72 hours:

• Revenue recognition: India was recognizing revenue on time-and-materials contracts when work was completed, not when invoices were paid (90-120 day collection cycle)
• Expense capitalization: India was capitalizing internal software development costs that the US parent expensed immediately in consolidation
• Intercompany pricing: The transfer pricing structure created artificial "profit" in India while consuming cash

The India GM wasn't lying. The India books, under India accounting standards, showed profit. But it was profit on paper. Cash flow reality was different.

The Decision Tree

Option A: Fix the accounting. Change revenue recognition to cash basis. Shows cash reality immediately, but the India P&L now shows losses and the GM loses credibility.

Option B: Fix the operations. Accelerate collections, reduce WIP. Addresses the root cause but takes 6-9 months.

Option C: Fix the reporting. Build a parallel cash flow view. Shows both realities but doesn't solve the problem.

Option D: Staged approach (Recommended). Week 1: Build a cash flow bridge. Weeks 2-4: Renegotiate intercompany pricing. Months 2-3: Working capital targets (DSO from 90 to 60). Month 4: Restructure compensation.

The Outcome

Results after 6 months:

• Cash outflows reduced from $800K/quarter to $200K/quarter
• DSO improved from 92 days to 58 days
• India operations genuinely profitable (cash positive within 9 months)

Key Principles

1. Profit ≠ Cash. Most operators know this intellectually. Few build systems that track both rigorously.
2. Incentives drive behavior. If the India GM is rewarded for P&L profit, he'll optimize for P&L profit, even if it consumes cash.
3. Working capital is a strategic choice. You can fund growth with equity, debt, or working capital efficiency. Most companies default to the first two and ignore the third.