Research essay
How a profitable business runs out of cash
Published
Executive summary
A business can make money on a sale and still fail before it collects. The crucial question is how much cash it needs at its worst moment—and whether that funding is actually available.
A worked explanation using hypothetical cash flows. Interest, fees and taxes are excluded from the timing comparison.
Imagine a small manufacturer with 10 in cash. It must pay 100 to complete an order and will collect 120 from its customer. The order has a positive cash margin. That does not answer whether the manufacturer can pay its supplier.
If the supplier must be paid first, the manufacturer needs a bridge of 90. If the customer pays first, it needs no bridge. The transaction totals are identical; their order changes the financing requirement.
This is why an annual cash-flow forecast can look comfortable while a business struggles on payday. A period total erases the sequence that determines whether individual obligations can be met.
All figures below are hypothetical currency units. Assume an interest-free bridge, repaid after collection.
| Step | Supplier paid first | Customer pays first |
|---|---|---|
| Opening cash | 10 | 10 |
| First event | Borrow 90, then pay 100: cash 0 | Collect 120: cash 130 |
| Second event | Collect 120: cash 120 | Pay 100: cash 30 |
| Repay bridge | Repay 90: cash 30 | No loan to repay |
| Largest borrowing need | 90 | 0 |
Both paths end at 30. With interest or fees, their ending balances would differ. The example isolates timing; it does not claim financing is free in practice.
List the dates on which payments fall due and receipts become usable. Start with unrestricted cash. After every event, calculate the balance before new financing. The most negative balance is the minimum bridge required for that particular path, before adding any chosen reserve.
This is a different number from total expenditure, annual loss or the amount of cash collected. It can be large even when the business ends the year with a surplus.
At each date, calculate:
Required funding = payments due so far + required cash reserve − receipts available so far − opening usable cash.
Take the largest positive result across all dates, or zero if every result is negative. This measures the peak need for a reusable bridge under the stated cash path.
Opening cash of 20 against payments of 35 gives a gap of 15. Do not subtract that opening 20 again when assessing whether a 15 credit line is sufficient. Likewise, count a reserve once: treating it as both a payment and a required ending balance doubles it.
Receipts expected on the same day as payments still require a settlement order. Cash in another currency is usable only if conversion and settlement occur in time.
An invoice is a claim on a customer. It becomes money in the account when the customer pays. An advance, receivables facility or agreed netting arrangement can change that timing, but each is a financing mechanism with its own terms.
The same distinction applies to credit. Calculating a gap of 90 does not establish that anyone will lend 90, or that a committed line can be drawn before the supplier needs payment. Profitability, liquidity and access to funding are separate questions.
Move the customer receipt later while leaving the promised payment dates unchanged. Recalculate the peak gap and the lowest actual balance. Then compare the required amount and timing with committed, drawable funding.
A bakery that pays for ingredients and labour before selling bread has this problem even without credit sales. A manufacturer selling on credit adds another delay between delivery and collection. Growth can therefore increase the cash required before the extra sales produce usable money.
Ask three questions: when is the money due, when is it usable, and who funds the interval? That sequence connects the operating story to survival.