Why profitable companies still run out of money - FChain

We’re making a profit. So why are we still short of cash?

This is one of the most common phrases business owners say. At first glance, it seems illogical. If a company is profitable, its cash balance should also be growing. In reality, however, profit and cash are not the same thing. Failing to understand this difference often leads to poor management decisions. Let’s look at a simple example.

A company completes a major order worth AZN 100,000. The work is finished, the documents are signed, and the revenue is recorded in the accounting system. At the end of the month, the company reports a profit. However, the customer has agreed to pay the invoice only after 90 days. The profit has already been recognized in the financial statements. But the money has not yet reached the company’s bank account. Meanwhile, the company still has to pay salaries, rent, taxes, suppliers and meet its other financial obligations.  On paper, the business is profitable. In reality, it may not have enough available cash.

Now consider another situation. The company purchases a large quantity of goods or raw materials. The payment has already been made to the supplier. However, these costs are recognized gradually in the profit and loss statement as the goods are sold or the materials are used. The result is the opposite situation. The cash has already gone. But the reported profit still looks healthy. That is why business owners should not focus on profit alone.

It is equally important to understand:

• how much cash is actually available to the business;
• when customer payments are expected;
• which obligations must be paid in the near future;
• whether accounts receivable are growing too quickly.

Profit shows how efficiently the business operates. Cash flow shows whether the business can meet its financial obligations on time. Both indicators are equally important. If a business owner looks only at profit, an upcoming cash shortage may go unnoticed until it becomes a serious problem.

On the other hand, focusing only on the bank balance may also lead to incorrect conclusions, as a temporary decrease in cash could simply be the result of inventory purchases or investments in future growth.

Good accounting helps business owners see the complete picture. It explains not only the financial result but also why the cash balance differs from reported profit and what business activities caused the difference. This is the kind of information that leads to better decisions and helps identify potential risks before they become real problems.

Tip for Business Owners

When reviewing your monthly results, don’t ask your accountant to show only the profit. Also ask them to explain why the company’s cash balance has changed compared to the previous month. Sometimes that single conversation is enough to identify a problem before it affects the business.

Article by Emil Nazarov

Accounting Department Manager

 

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