The Cashflow Reality: Why Profitable Businesses Suddenly Go Broke

Profit and success are often used interchangeably in business conversations. On paper, a company with healthy margins and a growing order book is considered strong. Yet, many such businesses face an unnerving reality — they simply run out of cash.

Across industries and geographies, businesses that appear profitable routinely find themselves unable to pay salaries, clear vendor dues, or meet routine operational expenses. It's not just counterintuitive — it’s dangerous.

This contradiction isn’t new. But what’s surprising is how widely it’s accepted. Entrepreneurs continue to chase topline growth, admire profit margins, and remain blindsided by the very thing that determines business survival: cash flow.

So, why do so many seemingly successful businesses struggle to stay afloat?

Profit is Not the Same as Cash

Profit is a number calculated after all expenses are deducted from revenue. It gives you a sense of performance. But it doesn’t reflect your ability to pay. That’s the job of cash flow.

Here’s a simple example. Suppose your company secures a ₹50 lakh order with a 20% margin. You immediately recognize this as a ₹10 lakh profit. But if your payment cycle stretches across 90 days—and your outflows (like rent, salaries, vendor payments, and EMIs) hit within 30 days—your business is starved of liquidity.

This isn’t an accounting error. It’s a timing error—and it’s how profitable businesses collapse. According to a U.S. Bank study, 82% of small businesses fail due to poor cash flow management, not because they are unprofitable.

In India, where delayed payments and credit-based dealings are deeply entrenched, this reality is even starker.

The Frequency of Financial Stress

A 2023 survey by Local Circles found that over 55% of Indian SMEs experienced at least one major cash flow crunch in the last 12 months. Around 36% delayed employee salaries, and 31% had to resort to high-interest emergency loans to meet routine obligations.

Most of these businesses were not loss-making. Some were growing, had full order books, and even expanding teams. But their receivables were delayed, collections were inconsistent, and cash reserves were poorly managed.

And this is not a rare event. It’s an ongoing pattern—and one that founders must stop normalizing.

The Illusion of Growth

Many entrepreneurs believe growth will solve all problems. More revenue, more orders, more clients—that’s the dream. But growth without cash flow is a mirage.

Often, the pursuit of growth makes the cash flow problem worse:

Clients negotiate longer payment terms.
Inventory purchases increase.
Teams expand ahead of receivables.
Overheads rise faster than collections.

These symptoms creep in quietly. And by the time founders notice, they’re already firefighting.

The Cash Flow Blind Spot

What’s more concerning is that most entrepreneurs don’t actively track cash flow. They rely on profit and loss reports, or wait for the CA to highlight red flags. By then, it’s too late.

Business coach Rajeev Saraogi, who advises SMEs on financial strategy, explains it succinctly:

“Profit is what your accountant shows you. Cash is what helps you sleep at night. And yet, we ignore the latter.”

He emphasizes building a rolling cash flow forecast — a dynamic tool that shows expected inflows and outflows over 8–12 weeks. It helps business owners anticipate trouble, negotiate better payment terms, and plan expenses wisely.

In his sessions, Moloy often asks entrepreneurs just one question: “If revenue drops by 30% next month, how many days can your business survive?” The uncomfortable silence that follows reveals how few actually know the answer.

Fixing the Cash Flow Culture

It’s time to stop treating cash flow as a backend finance function. Instead, it must become a core business metric, as important as revenue or profit.

Here are a few fundamental shifts every entrepreneur can adopt:

Track cash weekly, not just monthly.
Forecast cash flow for at least 2–3 months ahead, especially during periods of expansion or uncertainty.
Align payment terms with suppliers and clients, ensuring inflow timings match outflows.
Create a cash reserve fund, equivalent to at least 2 months of fixed expenses.
Avoid using future receivables as the basis for current spending.

These aren’t complicated tools. Even a well-managed spreadsheet can offer clarity — if used regularly.

A Cultural Mindset Shift

One of the biggest obstacles to cash consciousness is mindset. Talking about cash flow is often seen as a weakness — something that only struggling companies discuss. But that’s the wrong framing.

Cash flow isn’t a sign of struggle. It’s a sign of control.

A business that can manage its cash flow with discipline and foresight becomes resilient — capable of weathering market fluctuations, vendor delays, or economic shocks.

On the other hand, a business that celebrates profit while ignoring cash is like a mansion built on quicksand.

Final Thought: Cash is Not Just King — It's Oxygen

The biggest misconception in business is that profits ensure survival. They don’t. Not unless they’re converted into timely cash.

In the entrepreneurial journey, optimism is essential. But it must be grounded in cash reality. Growth is good. Profit is necessary. But only cash pays the bills.

Founders must start asking themselves harder questions:

Are we spending based on cash or expected inflow?
Can we afford the next hire or upgrade?
If a payment gets delayed, do we have a buffer?

Because the market doesn’t forgive misjudged timing. And no P&L can bail you out when the account is empty.