From the finance director's chair
Profitable but out of cash: how it happens and how to spot it
It sounds impossible: record sales, a healthy profit, and a CFO asking the bank for help. It's one of the most common stories in business.
- Profit counts a sale when you deliver. Cash arrives when the customer pays, sometimes months later.
- Late-paying customers, full warehouses and fast growth all swallow cash before profit turns into money.
- One number to watch: how many days customers take to pay you.
The gap between "sold" and "paid"
Imagine you run a lemonade stand and sell to the office next door on 60-day terms. Every glass shows up as profit today. The money shows up in two months. Meanwhile you still have to buy lemons, cups and sugar this week, in cash. Now imagine sales double. Congratulations, you need even more cash before you see any.
The five usual suspects
- Customers paying later. Finance calls it DSO, days sales outstanding: how long, on average, customers take to pay.
- Too much stock. Every product on a shelf is cash you've already spent and haven't got back.
- Growth. More sales means more stock and more unpaid invoices before the extra cash arrives. Fast growth eats cash.
- Investment. New machines, sites or systems are paid for up front, but the P&L only takes a slice each year as depreciation.
- Paying suppliers faster than customers pay you, or repaying loans.
Quick math: what 30 extra days cost
A business sells $12m a year, about $33,000 a day. Customers usually pay in 30 days, so roughly $1m is always sitting in unpaid invoices.
If customers drift to 60 days, that becomes about $2m. Nothing changed on the P&L, but about $1m of extra cash is now tied up with customers. It isn't lost, it's delayed. But while sales stay at that level, the delay doesn't go away.
How to spot it early
- Operating cash flow consistently below net profit (see how to read a cash flow statement).
- Receivables or inventory growing faster than sales.
- Overdue invoices piling up with your biggest customers.
- New borrowing used to pay day-to-day bills.
Why it matters to you
Sales managers set payment terms. Operations managers decide how much stock to hold. Project leads decide when to invoice. Each of those choices moves cash, often more than any cost saving. Longer payment terms are a cost too: someone has to fund the wait, usually with a loan or the company's own cash. Before agreeing to 90 days to win a deal, ask finance what that wait costs, and compare it with the discount the customer wanted.
A profitable company that runs out of cash still fails. When a manager brings me a big new contract, I ask about payment terms before I ask about margin.
"What are our average days to collect, and which customers are pushing it up?"