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A business can be profitable and still struggle for cash.
I have seen this happen even in reasonably good businesses.
At one of my client companies, the business operated in a good niche and was profitable. On paper, there was no major reason to worry about the business.
But every month, the CEO and the finance head struggled to secure cash for salaries and supplier payments.
Customer payments were getting delayed. Vendors started calling the founder directly to request payment. At times, the founder had to use his personal funds to manage the situation.
The business was making a profit. But the cash was not available when it was required.
This is not an uncommon situation in SMEs.
When this happens repeatedly, founders naturally start looking for more working capital, additional borrowing or ways to delay some payments. These may solve the immediate problem, but they may not solve the real problem.
The more important question is:
If the business is profitable, where is the cash getting stuck?
Understanding this is important because profitability and cash availability are not the same thing.
Why can a profitable business still struggle for cash?
Profit tells you whether the business is earning more than it is spending over a period of time.
But it does not necessarily tell you how much cash is available in the bank today.
For example, you may have completed the sale and booked the profit. But if the customer takes another 60 or 90 days to pay, that profit has not yet been converted to cash.
Meanwhile, salaries have to be paid. Suppliers need their payments. Electricity, rent, loan commitments and other operating expenses cannot always wait until the customer pays.
The same thing happens with inventory.
A company may be carrying large quantities of raw materials, work in progress, or finished goods. All of this represents money that has already left the business but has not yet returned as cash.
This is why I do not look at a cash flow problem only from the finance perspective.
When a founder tells me, “We are making profit, but I do not know where the money is going,” I normally start looking at a few basic questions.
How much money is sitting with customers?
How much is locked in inventory?
How efficiently is the business converting material into finished products and finished products into sales?
Are supplier payment terms aligned reasonably with customer collection terms?
How much cash is going towards interest and debt repayment?
Are there expenses or operational inefficiencies consuming cash without the founder noticing them?
Quite often, the answer is not in one place.
Cash may be getting blocked at several points across the business.
That is why a recurring cash flow problem should not automatically be treated as a requirement for more working capital.
Sometimes, the shortage of cash is only the symptom. The real problem may be somewhere else in the business.
Where does cash actually get stuck in an SME?
When cash becomes tight, the immediate reaction is often to look at the bank balance or ask the finance team to speed up collections.
But in my experience, cash does not get stuck only in the finance department. It gets stuck at different points across the business.
For an SME founder, a few areas deserve closer attention.
Are customers taking too long to pay?
Receivables are one of the first areas I look at when a company is facing cash flow pressure.
A business may be achieving its sales target and reporting profit, but if collections are consistently delayed, the business is effectively funding its customers.
This becomes even more serious when the company continues to accept new orders and increase sales without looking at the quality of its receivables.
Sales growth may look encouraging, but if the additional sales lead to longer credit periods and slower collections, the growth itself can create cash pressure.
Founders therefore need to look beyond sales numbers.
How much is outstanding?
How much has crossed the agreed credit period?
Which customers are repeatedly delaying payments?
Are commercial teams taking responsibility for collections, or is collection seen only as the finance team’s responsibility?
These questions often tell us more about cash health than the sales number alone.
Is too much cash locked in inventory?
Inventory is another area where substantial cash can remain invisible.
Raw materials, work in progress, and finished goods may all appear as assets in the accounts. But from a cash perspective, money has already gone into them.
I have seen businesses carrying inventory simply because they have always operated that way. Materials are purchased in excess, production is planned without sufficient connection to actual demand, and finished goods continue to accumulate.
In such situations, reducing inventory is not merely an inventory-control exercise. It releases cash back into the business.
This is why inventory levels, ageing, slow-moving items and unnecessary stock need management attention, particularly when the company is facing cash pressure.
Are operating inefficiencies silently consuming cash?
Cash can also disappear through day-to-day inefficiencies.
Low productivity, excessive overtime, poor material utilisation, rework, rejection, machine breakdowns, inefficient material movement, and poor production planning may individually appear to be operational issues.
But every one of them eventually has a cash impact.
When productivity is low, the business spends more to produce the same output.
When quality is poor, material and capacity are consumed without generating the expected value.
When planning is weak, companies may carry more inventory, use premium freight, pay overtime or make emergency purchases.
This is why I strongly believe that cash flow improvement cannot be separated from operational improvement.
Sometimes the finance team is trying hard to manage cash while the business continues to create unnecessary cash requirements elsewhere.
Are supplier payments and customer collections poorly aligned?
Another common issue is the mismatch between when the company has to pay and when it receives money.
For example, a company may have to pay suppliers within 30 days while its customers pay only after 60 or 90 days.
As sales increase, this gap can become larger.
The company then needs more working capital simply to support its growth.
This is why supplier terms and customer credit terms should not be considered in isolation.
The founder and the team need to understand the complete working-capital cycle and ask a simple question:
How long does it take for the cash we put into the business to come back to us?
Is debt servicing putting pressure on operating cash?
Borrowing is not necessarily a problem. Many growing businesses need working capital loans, equipment finance or other forms of debt.
The concern starts when a significant portion of operating cash is continuously going towards interest and repayments, while the underlying business continues to generate cash shortages.
Taking another loan may provide temporary relief. Refinancing may also be useful in the right situation.
But before increasing borrowing, I believe the founder should understand why the business repeatedly needs more money.
Is the business genuinely funding growth?
Or is debt being used to compensate for slow collections, excess inventory, poor productivity or uncontrolled expenses?
That distinction is important.
More finance can support a healthy business. But more finance alone cannot correct an unhealthy cash cycle.
What should founders review regularly to stay in control of cash flow?
Cash flow should not be a topic of discussion only when there is a cash shortage.
By then, the founder and finance team are already reacting to the situation.
One simple practice I have found effective is to establish a regular cash review rhythm.
In one of my client companies, cash availability was becoming a recurring concern. Customer payments were being delayed, supplier payments were becoming difficult to manage, and the CEO and finance head were spending considerable time deciding which payments to prioritise.
We introduced a simple discipline.
Every Monday, the accounts team and CEO reviewed receivables and payables together.
The discussion was not complicated.
Which customer payments are due this week?
Which overdue payments need immediate follow-up?
What supplier payments and other commitments are coming up?
How much cash is expected to come in?
Where is there likely to be a gap?
Who is responsible for following up on each critical collection?
This simple review brought much better visibility to the situation.
More importantly, the team started looking ahead rather than waiting for the cash shortage to happen.
Why is cash flow forecasting important?
Many SMEs know their current bank balance. But knowing today’s bank balance is not the same as knowing the business’s cash position.
A founder should have reasonable visibility of what is likely to happen over the next few weeks.
If salaries are due next week, a major supplier payment is approaching, and an expected customer collection has been delayed, the business should know the likely impact before the payment date arrives.
A simple cash flow forecast can provide this visibility.
It need not become an elaborate financial model.
The purpose is to answer a practical question:
Based on the expected cash inflows and the commitments we already know, where are we likely to face cash pressure?
Once this becomes visible early, the management team has more choices.
Collections can be followed up earlier. Supplier payments can be planned better. Non-critical expenditure can be postponed if necessary. Commercial and operating teams can also be involved when their actions affect cash.
Should cash flow be the finance team’s responsibility alone?
This is another area where I see a problem in many businesses.
The finance team may prepare the cash flow statement, but it cannot control every factor affecting cash.
Sales and commercial teams influence customer credit and collections.
Operations influence productivity, WIP and finished-goods inventory.
Purchase and supply chain influence material inventory and supplier terms.
Quality problems create rejection and rework.
Management decisions influence capital expenditure and borrowing.
So, while finance should provide visibility and discipline, cash flow has to become a business responsibility.
The founder does not need to chase every customer or personally approve every payment.
But the founder and business head should ensure there is a clear review mechanism, clear ownership, and action when cash starts getting blocked.
The objective is not to manage the business from one cash crisis to another.
The objective is to detect the pressure early enough to act on it.
Why should founders look beyond the cash flow statement?
When a business is facing cash pressure, it is important to review receivables, payables, and the cash forecast.
But that alone may not tell the complete story.
I also encourage founders to review the P&L regularly because some of the reasons for cash pressure start to show up there.
In most of my client engagements, I establish a discipline of reviewing the monthly P&L, preferably before the 10th of the following month.
The purpose is not merely to determine whether the company has made a profit or incurred a loss.
We look at what has changed.
Has material cost increased?
Has overtime gone up?
Are freight expenses unusually high?
Have rejection or rework costs increased?
Is manpower cost increasing without a corresponding improvement in output?
Are there expenses which are significantly different from the previous month or from what was planned?
When these variations are reviewed month after month, the management team starts to see patterns that might otherwise go unnoticed.
Why does this matter for cash flow?
An abnormal expense is not merely a number in the P&L.
It is cash that has left the business.
For example, poor production planning may result in overtime and premium freight.
Quality problems may increase rejection and rework.
Low productivity may increase the cost of producing the same output.
Poor maintenance may lead to breakdowns, emergency purchases and lost capacity.
Each issue may be discussed individually as an operational problem.
Collectively, they can create significant pressure on cash.
This is why I do not believe that a founder should look at the P&L only at the end of the year or leave it entirely to the accountant.
A monthly P&L review helps the founder and leadership team understand whether the business is converting its sales into healthy operating performance.
More importantly, it allows them to act before a small leakage becomes a recurring problem.
What should the founder look for in the monthly P&L?
The founder does not need to become an accountant.
The important thing is to understand the business’s movement.
What has changed from last month?
What is significantly different from the plan?
Which costs are increasing faster than sales?
Is gross margin improving or deteriorating?
Are operating expenses under control?
Is the business generating enough operating profit to support its working-capital needs and financial commitments?
The discussion should ultimately lead to action, not merely explanation.
If an expense has increased, somebody should understand why.
If the reason is operational, the operating team should act.
If it is commercial, the commercial team should act.
If it is structural, the founder and leadership team may need to make a larger decision.
Cash flow tells you where the business is feeling the pressure. The P&L can often help you understand where some of that pressure is coming from.
How do productivity and operational discipline improve cash flow?
When we talk about improving cash flow, the discussion normally moves towards faster collections, delaying payments or arranging additional working capital.
These are important. But there is another side which SME founders should not ignore.
How efficiently is the business using the money already deployed in operations?
Every additional day of inventory, every rejected component, every hour of unnecessary overtime and every avoidable machine breakdown has a cost.
When these problems become routine, they gradually consume cash.
How does productivity affect cash flow?
Improving productivity means getting better output from the resources already available.
If the same manpower, machines and facilities can produce more saleable output without a proportionate increase in cost, the business becomes more efficient.
The opposite is also true.
If output increases only by adding manpower, overtime, machines and inventory, sales may grow but the business can become heavier.
This is particularly important when a company is growing.
A founder should therefore not look only at:
“How much more can we produce?”
The better question is:
“How much more can we produce from the resources we already have?”
That difference has a direct impact on profitability as well as cash.
How does inventory reduction release cash?
Inventory deserves special attention because money can remain locked there for months without appearing as an immediate problem.
Raw materials may have been purchased much earlier than required.
Work-in-progress may be waiting between processes.
Finished goods may be produced without clear dispatch requirements.
Slow-moving and non-moving materials may remain in stores for years.
All of this represents cash already invested by the business.
This is why I encourage companies to look at inventory not merely as material in the factory, but as money sitting inside the factory.
Better planning, improved material flow, shorter lead times and closer coordination between sales, production and purchase can reduce unnecessary inventory without affecting customer service.
When inventory comes down sustainably, cash gets released.
Why do waste and quality problems matter to cash?
Rejection and rework are often discussed as quality indicators.
But they are also financial indicators.
By the time a product gets rejected, the company may already have spent money on material, manpower, machine time, power and other processing costs.
Rework consumes resources again without creating additional sales.
The same principle applies to poor material utilisation, unnecessary movement, excess processing and other forms of waste.
Reducing these losses improves cost. But more importantly, it prevents cash from being consumed without creating value.
Should cost reduction be the objective?
I would be careful about treating cash flow improvement simply as a cost-cutting exercise.
Reducing an expense without understanding its business impact can create another problem.
Cutting maintenance may save cash this month but create breakdowns later.
Reducing critical inventory without improving planning may affect customer delivery.
Avoiding necessary capability building may reduce today’s expenditure but weaken tomorrow’s growth.
The objective therefore is not:
“Where can we spend less?”
The better question is:
“Where is the business consuming cash without creating adequate value?”
That distinction is important.
A healthy business does not improve cash flow merely by spending less.
It improves cash flow by using its resources more productively, reducing avoidable losses and converting the money invested in operations back into cash faster.
How much cash reserve should a business maintain?
Even a well-managed business can face unexpected cash requirements.
A major customer may delay payment. Sales may slow down temporarily. A critical machine may require an unplanned repair. Material prices may increase suddenly. Or the business may face an expense which was not anticipated.
This is why I have always believed that a business should maintain a cash reserve.
In my earlier thinking, I recommended maintaining a reserve equivalent to about 6 months of material and operating expenses. The intention behind this was simple: the business should not become vulnerable to a single unexpected disruption.
However, the appropriate reserve cannot be the same for every business.
A company with predictable monthly collections, low debt and easy access to working capital may require a different buffer from a company where customer payments are volatile and fixed commitments are high.
The founder therefore needs to look at the nature of the business.
How predictable are customer collections?
How much fixed expenditure must be met every month, regardless of sales?
What are the salary and statutory commitments?
How dependent is the business on a few large customers?
What debt repayments are coming up?
How easily can the company access working capital in the event of a temporary disruption?
These factors should determine the level of liquidity the business needs.
Is every surplus in the bank available for spending?
This is another discipline founders need to develop.
A healthy bank balance at a particular point in time does not necessarily mean that the business has surplus cash.
Part of that money may already be required for salaries, taxes, supplier payments, loan commitments or upcoming purchases.
Before treating available cash as surplus, the founder should understand the upcoming commitments over the next few weeks and months.
A defined liquidity buffer can help create this discipline.
The reserve should also be maintained in a form appropriate to the company’s liquidity requirements, risk profile, and financial policies, with useful professional advice where necessary.
The objective is not to accumulate cash without purpose.
It is to ensure that a temporary disruption does not force the business into desperate borrowing, delayed salaries, or problems with critical supplier payments.
A cash reserve gives the founder something very valuable in an unexpected situation: time to make a considered decision rather than being forced into an immediate one.
When does borrowing become a cash flow warning sign?
Borrowing is a normal part of running and growing a business.
Working capital limits can support the operating cycle. Term loans can help fund machinery and expansion. Additional finance may also be required when a business is growing faster than the cash it can generate internally.
So, I do not see borrowing itself as a problem.
The concern starts when borrowing becomes the regular solution for a recurring cash shortage.
A company faces a cash gap, increases its working capital limit and gets temporary relief.
After some time, the cash pressure comes back.
Another facility is arranged, supplier payments are stretched, or additional money is brought into the business.
When this cycle keeps repeating, the founder needs to ask a more fundamental question:
Why does the business continue to require more cash?
Is the borrowing supporting growth or covering a weakness?
This distinction is important.
If sales are growing profitably and the business needs additional working capital to support higher receivables and inventory, the requirement may be understandable.
But if additional borrowing is required because customers are not paying on time, inventory is continuously increasing, margins are deteriorating,g or operating inefficiencies are consuming cash, more borrowing may only postpone the problem.
The business now has the original cash-flow problem plus an additional interest and repayment commitment.
This is where debt can gradually start putting pressure on the business.
Should refinancing be considered?
There can certainly be situations where refinancing existing debt makes sense.
If a business is carrying high-cost debt or if its repayment structure is misaligned with its cash-generation cycle, restructuring or refinancing may reduce immediate pressure.
But refinancing should not become a substitute for correcting the underlying business problem.
Before taking that decision, I would want the founder to understand:
What is creating the cash gap?
Is it temporary or recurring?
Can the business comfortably service the proposed debt?
Will the additional ffinancinggenerate esufficientbusiness rreturns
And most importantly:
What will be different after taking the additional money?
If nothing changes in collections, inventory, profitability, or operating discipline, the business may face the same cash problem again with a higher debt burden.
This is why I would not start a recurring cash-flow problem with the question:
“How much more can we borrow?”
I would start with:
“Why does the business need to borrow again?”
That question can lead the founder much closer to the real problem.
What cash flow discipline should an SME founder build?
Good cash flow management does not require the founder to get involved in every payment or collection.
What is required is a simple management discipline that gives enough visibility before a problem becomes a crisis.
From my experience, I would focus on a few things:
- Review receivables and payables regularly, with clear ownership for overdue collections.
- Maintain visibility of expected cash inflows and major commitments for the coming weeks.
- Review the monthly P&L and investigate unusual movements rather than focusing solely on the final profit number.
- Keep inventory under control and watch where money is unnecessarily locked in raw materials, WIP, and finished goods.
- Improve productivity and reduce operational losses that continuously consume cash.
- Before taking additional borrowing, understand why the business needs more money and whether the underlying problem is being corrected.
- Maintain an appropriate liquidity buffer based on the nature and risk of the business.
The objective is not to keep more cash sitting idle.
It is to ensure that the business can meet its commitments, fund its operations and support growth without continuously putting the founder under financial pressure.
For an SME founder, that is an important sign of a financially stronger business.
Profit tells you whether the business is earning. Cash flow tells you whether the business can keep moving. A healthy business needs both.
To sum up
A business becoming bigger does not automatically mean it is becoming financially stronger.
As sales grow, the business needs to manage receivables, inventory, operating efficiency, profitability and cash with greater discipline. Otherwise, growth itself can start creating financial pressure.
This is why cash flow is an important part of Business Performance Capability in the Profitable Growth Capability Framework (PGCF).
For a founder, the objective should not simply be to grow sales. It should be to build a business where sales growth translates into stronger profitability and healthier cash flow.