The management blind spot
A profitable income statement does not show when customers will pay, when suppliers must be settled or how much cash is absorbed by inventory, tax, debt and capital expenditure. A business can therefore report growth while its available liquidity contracts.
Follow the cash conversion cycle
Management should connect receivable days, inventory days and payable days to the operating forecast. Small changes in these drivers can create a funding requirement that is material relative to reported earnings. The analysis should also separate recurring working capital from overdue or disputed balances.
Build an early-warning view
A rolling cash forecast should reconcile opening cash, operating collections and payments, financing flows and restricted balances. It should show the minimum cash point, available facilities and decision dates—not only the month-end balance.
The board question
The useful question is not simply whether the company is profitable. It is whether the business model, collection cycle and capital structure can fund the planned rate of growth without creating an avoidable liquidity event.
This article provides general information and does not constitute financial, investment, legal or tax advice.