Why do profitable businesses run out of money?

Profit is an accounting measure and cash is a bank balance, and they diverge because of timing. Under accrual accounting, revenue is recorded when earned rather than when received, so a business can show a strong profit for a quarter in which no client actually paid. Meanwhile payroll, rent, software, and supplier invoices come due on their own schedule. A growing business makes this worse rather than better, because growth means spending on inventory, staff, and capacity ahead of the revenue those investments eventually produce, which is why companies fail while their sales charts point upward.

The specific mechanisms worth watching are receivables, inventory, and payables. Money sitting in unpaid invoices is money you earned and cannot spend, and the average collection period is the number that determines whether you can make payroll. Inventory is cash converted into objects on a shelf. Payables work in your favor, since supplier terms are effectively short-term financing. The cycle connecting them, how long cash is tied up between paying for inputs and collecting from customers, is the operating figure that predicts whether a business survives a slow month.

The defenses are unglamorous and effective. Invoice immediately rather than at month end, since the clock does not start until the invoice is issued. Shorten payment terms and enforce them, because net 30 that is habitually paid at 60 is really net 60. Require deposits on substantial projects. Watch a rolling thirteen-week cash forecast rather than a profit and loss statement, since the forecast is what tells you about the week you cannot cover. And establish a line of credit before you need it, because credit is available on reasonable terms precisely when your finances look healthy and unavailable when they do not.