Every accountant knows a version of this story. A business posts its best year ever—record revenue, healthy margin, a profit and loss statement worth framing. Six months later it is fighting for survival, juggling payroll against supplier demands, because there is no money in the bank.
How does a profitable business run out of cash? Easily, and more often than you would think. Until an owner understands why, no amount of sales growth will make the business safe. Growth usually makes it worse.
Profit and cash live on different calendars
Profit is an accounting construct. It records a sale when you invoice, not when you get paid. It spreads the cost of equipment over years. It is shaped by judgments—about depreciation, provisions, accruals, revenue recognition—which is why I say, only half-jokingly, that profit is an opinion. A well-informed, professionally regulated opinion, but an opinion nonetheless.
Cash is different. Cash is the balance in the account. It pays wages, suppliers, rent, and the tax authority, and none of them accept opinions. Cash is a fact, and it is the lack of facts that businesses die from.
The trouble is that the two run on different calendars. You buy stock in January, pay for it in February, sell it in March, invoice with 30-day terms, and get paid—if you are lucky—in May. The P&L shows a profitable March sale. Your bank account shows four months of money going out before a penny comes in.
Why growth can kill
Now scale that up. Suppose demand doubles. Wonderful news on the P&L. But doubling sales means doubling the stock you buy in January and doubling the receivables you wait on until May. The faster you grow, the more cash gets swallowed into the gap between paying suppliers and collecting from customers.
This is why so many insolvencies are growth stories. The business did not fail despite growing; it failed because it grew without financing the working capital that growth demands. This is also precisely where the bankability gap from last week’s article bites hardest: the moment a growing SME most needs working capital financing is the moment it most needs to demonstrate visibility and control.
The three questions that matter more than “Are we profitable?”
Profitability is a vital long-run question. But week to week, three cash questions matter more:
- How much cash do we have, right now? Not roughly. Exactly—across every account, today.
- What is coming in and going out over the next 13 weeks? Payroll dates, tax deadlines, supplier runs, expected collections. Mapped, not remembered.
- How long is our cash trapped? From the day you pay a supplier to the day a customer pays you—how many days does a dollar spend locked inside your operations?
That third question has a formal name: the Cash Conversion Cycle. It is the single most powerful number most SME owners have never calculated, and when the series returns on 10 August I am going to demystify it completely—how to compute it from numbers you already have, and what “good” looks like.
Your one action this week: answer question one today. Open every business account and write down the total. Then try question two for just the next four weeks. If you find you cannot map a month ahead with confidence, you have learned something more important than any P&L can tell you.
A note on timing: Money Moves Forward pauses for two weeks to make room for Crop Over. The festival’s final week runs from 27 July and culminates in Grand Kadooment on Monday 3 August. Wishing everyone in Barbados and across the region a happy, safe and enjoyable season.
Subscribe to the Foresight newsletter—the next piece, on the Cash Conversion Cycle, lands Monday 10 August. It is the cornerstone of this whole series, and September brings the tool that automates all of it.