Important: This is an illustrative composite created from recurring financial patterns. It does not describe an identified organisation or client.
A company can be profitable and still run out of cash.
This is not accounting sorcery. It is usually a timing problem wearing a successful suit.
The income statement records whether the business earned a profit over a period. The bank account records whether cash arrived before salaries, suppliers, tax and lenders expected to be paid. Those are related questions. They are not the same question.
In this decision autopsy, the company was growing, margins were holding and the board pack was accurate. Nothing appeared to be on fire.
The cash forecast said otherwise.
What management was told
The monthly pack presented a business moving in the right direction:
- revenue was 18% above the previous year;
- gross margin remained above 30%;
- EBITDA was positive;
- the order book was strong; and
- management expected several large receipts before month-end.
Every statement was defensible.
The problem was not that the numbers were wrong. The problem was that the pack answered the profitability question and allowed everyone to assume it had also answered the liquidity question.
It had not.
What the numbers were already signalling
Four warnings were visible, but not assembled into one decision.
1. Customers were paying later
Average collection time had moved from 47 days to 71 days.
That change did not immediately destroy profit. It did force the company to finance another 24 days of customer credit. Revenue looked better. Cash conversion did not.
The business had effectively become a bank, except without the pleasant advantage of charging bank interest.
2. Cash risk was concentrated
The three largest customers represented 46% of trade receivables.
The forecast assumed all three would pay broadly on time. A delay by any one of them created pressure. A delay by two produced a funding gap.
The base forecast therefore depended on several large receipts behaving exactly as expected. That is not a base case. It is optimism with spreadsheet borders.
3. Payments were less flexible than receipts
Payroll was fixed. Suppliers expected payment within 30 days. Tax and VAT had specific due dates. Several project costs had to be incurred before the next billing milestone.
Customer receipts could move. Most of the outflows could not.
This timing asymmetry was the real risk. The company was profitable on paper while cash was being trapped in receivables and unfinished delivery.
4. The forecast was a file, not a control process
A 13-week forecast existed, but it was updated irregularly. There was no named owner for the major receipts, no weekly comparison of forecast to actual and no stress case for delayed collections.
The forecast therefore described a preferred future. It did not operate as an early-warning system.
When the receipts were moved to realistic dates and one large customer was delayed by two weeks, the minimum cash balance became negative in week nine.
The company was not in trouble that day.
It was eight weeks away from losing the freedom to choose calmly.
What was missed
The board pack contained profit, revenue, margins and receivables. It contained the ingredients.
It did not contain the decision architecture.
No single view showed:
- when cash would actually arrive;
- which receipts carried the greatest concentration risk;
- which outflows could not move;
- the minimum cash balance under a realistic stress case;
- how much time remained before intervention became compulsory; or
- who owned each corrective action.
This is why an accurate board pack can still mislead a board. Accuracy proves that the reported numbers reconcile. It does not prove that the information has been assembled around the decision that now matters.
The decision that should have changed sooner
The correct response was not a dramatic restructuring. There was still time.
Management needed to act before the bank balance became the chairman of the meeting.
The practical actions were straightforward:
- Put named owners against the largest receipts. Collection forecasts should be supported by evidence and accountability, not a general belief that customers usually pay.
- Rework commercial terms. Deposits, milestone billing and payment terms needed to reflect the cash profile of delivery rather than leaving the company to fund customer projects.
- Delay discretionary commitments. Expenditure that did not protect delivery, revenue or critical capability could wait until the cash floor recovered.
- Arrange contingent funding while the company still looked healthy. Funding is easier to negotiate before it is urgently required.
- Run the 13-week forecast every week. Compare forecast to actual, explain material variances, update the base and stress cases and attach actions to the weeks where pressure appears.
None of these steps required panic.
That was the value of seeing the problem in week one rather than discovering it in week eight.
The diagnosis
The company did not have a profitability problem.
It had a cash-conversion problem, a concentration problem and an information-timing problem.
Those distinctions matter because each diagnosis produces a different decision. Cutting costs alone would not fix slow collections. Increasing sales without changing payment terms could make the cash position worse. Reporting another profitable month would not move a single overdue receipt into the bank.
The board needed a different view, not merely more numbers.
The Executive Compass view
A useful financial operating system should reveal three things early:
- the pressure: where and when the cash position becomes constrained;
- the cause: which assumptions, customers, projects or commitments create the exposure; and
- the decision: what must change while management still has options.
Profit tells the board whether the business is creating economic value.
Cash tells the board whether the business can remain alive long enough to collect it.
Both matter. Confusing them is expensive.
Build a free 13-week cash forecast in the Executive Compass™ Cash Command Centre. The tool runs in the browser and is designed to expose timing pressure, cash buffers and funding gaps before they become emergencies.
See the pressure before it becomes the decision