The profitable company that ran out of cash

A record year and an overdrawn account

The accountant arrives with the year-end statements and the news is good: best year in the company's history, record profit, everything up. The owner listens with a half-smile, because that same morning he called the bank for an overdraft to make Friday's payroll. Two truths about the same business, on the same day: it earns like never before and it has no cash.

There is no accounting error. There is a confusion that runs over profitable mid-sized companies every year, and that is almost never taught with the clarity it deserves: profit is not cash. One is measured on the income statement; the other lives in the bank account. Between the two sits a cushion called working capital, which in growing companies —and even more in those growing with inflation— swallows the cash in silence.

This article is about where that cash hides, why growth devours it, how inflation turns an inconvenience into a threat, and what you do to regain control before the problem announces itself the most expensive way: a Monday with nothing to pay with.

Profit is not cash: the conversion cycle

Every company that buys, transforms or sells on credit lives with a gap: first it puts the money in —it pays the supplier, produces, builds the stock— and only later gets it back, when the customer pays. That gap in time has to be financed. It can be measured, and the technical name is as old as it is useful: the cash conversion cycle, formalized by Verlyn Richards and Eugene Laughlin in 1980.

The calculation is brutally simple. To the time the goods sit in the warehouse (days of inventory) you add the time the customer takes to pay (days of receivables), and you subtract the time the company takes to pay its supplier (days of payables). What remains are the days the money is out, financed by the company: days of inventory + days of receivables − days of payables.

A concrete example shows the size of the matter. A distributor sells twelve million a year, with cost of goods at 70%. It holds 60 days of inventory, collects in 45 days and pays its suppliers in 30. Its cycle is 60 + 45 − 30 = 75 days. Translated into locked-up cash: about 1.48 million in receivables, 1.38 in inventory, minus 0.69 that suppliers finance. Total: 2.17 million dollars sitting still, financing the turning of the business — 18% of sales converted into cash that is not in the account, but spread across the warehouse and the street.

Those 2.17 million are not a problem in themselves: they are the price of being in business. The problem appears when that number grows faster than the company's ability to fund it. And there is one thing that makes it grow without anyone deciding to: success.

Why companies go broke growing

Here is the trap almost nobody was told about. If the cash cycle is positive, each additional dollar of sales demands an additional chunk of locked-up cash. Working capital is not a start-up cost paid once: it grows, almost in proportion, with sales. Selling more does not relieve the cash; it squeezes it.

Let's stay with the distributor. It has a great year and grows 30%: from twelve to 15.6 million. Since its cycle did not change, its working capital also grows about 30%: from 2.17 to some 2.82 million. It needs an additional US$650,000 in cash, just to finance the growth — money that has to be found before the growth pays for itself. If its net margin is 6%, that 3.6 million of sales growth left it about US$216,000 in extra profit. The arithmetic is merciless: for every dollar of new profit, growth locked up about three of cash.

Hence an idea that should hang on every boardroom wall: there is a maximum speed at which a company can grow while funding itself. Robert Higgins formalized it in 1977 as the sustainable growth rate: it depends on how much the company earns, how much it reinvests and how much cash its cycle demands. Below that speed, growth self-funds. Above it, every extra point has to be funded with debt or with capital from the owners — and if it is not secured in time, the profitable business runs out of fuel on the best curve. Growing without watching the cash is not ambition: it is betting the bank will always be on the other end of the phone.

The inflation multiplier

Everything above is true at zero inflation. With inflation, the cash cycle stops being a financial inconvenience and becomes a machine for melting profitability, through two channels that add up.

The first: the money that is out melts away. Every day an invoice takes to be collected, the peso that will come in is worth less than the one that went out. Granting terms at a nominal price is, with inflation, a real discount that appears on no price list — it is the same truth that holds for prices: days of credit are price. At 5% monthly inflation, collecting in 60 days is equivalent to giving away close to 9% of the value, without anyone having decided it or written it down.

Real discount of granting terms, by monthly inflation and days of collection. It is margin given away without deciding to.

The second channel is subtler and more dangerous: accounting profit lies in your favor. The company sells with a margin calculated on the historical cost of the goods —what it paid two months ago— but has to replace those goods at today's cost, which is higher. Part of the "profit" on the statement is not profit: it is the higher value of the stock, which evaporates the moment you have to buy again. The real margin, measured at replacement cost, is quite a bit thinner than the one the income statement shows. That is why accounting standards for high-inflation economies —IAS 29, the restatement known in Argentina as inflation adjustment— exist: so the statements stop telling an optimistic story. But most mid-sized companies read the nominal number, celebrate, and distribute a profit that is partly not there.

With high inflation, a company can post a profit, pay dividends and run out of working capital — all at the same time.

The cycle that was a detail at 3% inflation is, at triple-digit inflation, existential.

The architecture of cash: five fronts

That this is not a problem only of badly run companies is shown by the scale. Even among the thousand largest companies in the United States, The Hackett Group's annual survey found in 2025 around US$1.7 trillion of excess working capital locked up — a third of the total, and the equivalent of 11% of their revenue. If the ones with entire treasury teams leave that cash on the table, the mid-sized company, which does not even measure it, leaves proportionally more.

The good news is that working capital is one of the few sources of cash that do not depend on selling more or securing a loan: they depend on managing better what is already done. Five fronts, in order of impact.

1. Measure the real cycle. Almost no mid-sized company knows its cash cycle, not by product, not by customer, not by channel. The first deliverable of any serious working-capital work is that number —days of inventory, of receivables and of payables— and its evolution. What is not measured, here, cannot be shortened. And there is usually a surprise waiting: the big client who "is the best" turns out to be the one that locks up the most cash, because it pays in ninety days.

2. Collecting is part of selling. Collection is not an administrative task for later: it is the real close of the sale. Terms as policy and not as default; credit limits per customer; a collection cadence that starts before the due date, not after; and —the golden rule that comes from pricing— terms are priced: whoever wants ninety days pays differently from whoever pays on delivery. In any diagnosis, collection is where the most cash appears the fastest.

3. Inventory: less and faster. Every day of stock is dormant cash and obsolescence risk. It is not about breaking the service level, but about ceasing to finance out of habit what is not needed: distinguishing the few products that sustain the business from the long tail that only gathers dust and capital, negotiating consignment where possible, and measuring inventory in days, not in pesos —because in pesos, with inflation, it always "seems" to rise for good reasons.

4. Pay without giving it away. Payment terms to suppliers are the only leg of the cycle that gives cash instead of consuming it, and they are almost always worse negotiated than collection. Symmetry is healthy: if the company grants thirty days, it should not pay in fifteen. With one caveat that inflation makes central: sometimes it pays to pay early, if the prompt-payment discount beats what financing costs or what inflation melts away. That is a calculation, not a habit — and it must be done.

5. Price and terms, in the same decision. The most expensive mistake of the mid-sized company under inflation is setting the price in one meeting and the terms in another. They are the same decision. Index where you can, quote price-and-terms as a package, and —above all— govern growth against available cash: do not grow faster than you can fund, unless the funding has been secured on purpose and in advance.

And above all five, a routine: a thirteen-week projected cash flow, reviewed every week, with an owner. It is the cheapest and most ignored dashboard of the mid-sized company. It does not predict the future; it gives warning in time — which is the only thing you can ask of a cash dashboard.

The difficult conversation

Three phrases prop up the status quo. All three have an answer.

"Selling more is always good." Not if each sale locks up cash you do not have. A company can grow toward insolvency with a smile, because the income statement keeps it company until the end. The question is not how much you sell, but how much of that comes back to the account, and when.

"Granting terms is what the market asks for." Maybe — but then it gets priced. Terms are a financial product the company sells to the customer; giving them away is the most common and least visible way to destroy margin in a country with inflation. Granting them with eyes open and with a price is competing; granting them out of inertia is subsidizing.

"The statements show a profit." They show a nominal profit, at historical cost. The boardroom question is another: does that profit cover replacing the stock at today's price and financing next year's working capital? If the answer is not clear, distributing dividends is distributing working capital — and the loan to replace it will cost far more than the dividend that was paid.

A company can earn on paper and be left with nothing to pay with. The difference between the two has a name, is measured in days, and is managed — before a Monday when the cash announces it on its own.