Profit vs cashflow: why good firms still go under

It’s one of the oldest paradoxes in business: companies that look strong on paper collapsing almost overnight.

You can have a growing customer base, rising revenues, and impressive margins, and still run out of money. This isn’t because the business model doesn’t work, but because cashflow timing does.

The problem isn’t always obvious. Profit tells you you’re creating value. Cashflow tells you whether you’ll survive long enough to realise it.

In the first of a two-part series, we’ll look at why profitability can be misleading, how cashflow gaps quietly sink even the healthiest companies, and what founders can do to spot trouble early before it hits the bank balance.

Profit vs. cashflow

It’s easy to assume that making a profit means having money, but in reality, they measure completely different things.

• Profit is a record of value created. It’s revenue minus costs, often measured quarterly or annually.
• Cashflow is a measure of liquidity,  the timing of money moving in and out of your business, daily or weekly.

Profit is the story of success, while cashflow is the story of survival.

You can show a profit on your income statement while your cash position is shrinking fast.

This is because cashflow is about timing, not totals. If you send an invoice today but get paid in 60 days, that’s 60 days of operations to fund without that income in your account.

And that’s what quietly sinks businesses that look profitable.

A US Bank study cited by SCORE found that 82% of business failures are caused by poor cashflow management or a lack of understanding of cashflow.

Profit measures your past performance, while cashflow determines your future survival.

The hidden fragility of balance sheets

If your P&L shows profit but your cashflow is negative, you’re burning through resources faster than they arrive. 

That’s fine temporarily, but only if you can bridge the gap.

Five common patterns create this disconnect:

1. Delayed payments. Long payment terms or late-paying clients create invisible strain. The average UK SME waits 54 days to receive payment for invoices, despite 30-day terms, tying up an estimated £32 billion in unpaid invoices. 
2. Rapid growth. Scaling fast means higher outgoings on new hires, suppliers, and systems, before revenue has caught up.
3. Customer acquisition costs. You spend upfront to acquire customers but only recoup that investment months later.
4. Seasonal cycles. Peaks and troughs in demand distort cash availability even when margins are strong.
5. Stock-heavy models. Inventory ties up cash that could otherwise fund operations.

The trap is that each of these looks like progress on a balance sheet. Sales are up, costs are invested, and stock is available, but in cash terms, you’re exposed.

The founder’s blind spot

Most founders think about growth in terms of revenue, users, or headcount. Few think about liquidity - the rhythm of cash in motion.

The issue is psychological as much as financial. Growth feels exciting, but cashflow feels administrative. It’s seen as bookkeeping, not strategy.

However, cashflow is the heartbeat of a business. When it falters, everything else suffers, from innovation to hiring, and even customer experience. 

Poor cash visibility also drives poor decisions. Founders who don’t track liquidity often overhire, overspend on marketing, or delay investment in systems because they can’t see the timing risk.

According to Xero’s Money Matters report, 52% of UK small businesses experience regular cashflow problems, and 44% say these issues directly affect their decision-making. 

And the strain isn’t just financial. Tide’s Small Business Index found that 25% of SME founders say cashflow pressure impacts their mental health and ability to focus on long-term growth.

Why profitable companies still go under

Cashflow issues are rarely about one-off mistakes. They’re often built into how the business operates.

Consider a company growing 30% quarter on quarter. Investors love it, the team is excited, and the founder’s dashboard glows green. But the cash position is eroding because:

• New hires double payroll.
• Clients pay in arrears.
• Marketing spend is front-loaded.
• Suppliers demand deposits.

The business might show profitability in accounting terms, but the reality is a widening cash gap.

When growth is fast, working capital requirements balloon. The more you sell, the more cash you need upfront to sustain it.

A study by JPMorgan Chase Institute found that rapidly growing companies are 20% more likely to experience cashflow shortfalls than stable firms, as higher outgoings outpace income.

As one PwC report put it: “Growth without liquidity discipline is the most common cause of failure among profitable businesses.”

Growth doesn’t kill companies, the cashflow that fuels it does.

The cultural side of cashflow

Most cashflow crises are more likely to be caused by culture than by  finance teams. 

In high-growth startups, the prevailing attitude can be to push forward and fix later. Finance can be framed as a back-office function instead of a strategic lever.

But the companies that thrive long-term build financial awareness into their culture early. They make cashflow part of everyone’s responsibility, not just the CFO’s.

Here’s what that looks like in practice:

• Teams understand how delayed projects or unpaid invoices affect the whole company.
• Department heads link spending decisions to cash cycles, not just budgets.
• Founders communicate cash realities openly, celebrating liquidity improvements like sales milestones.

Spotting the early warning signs

Cashflow problems can often arrive unnoticed. 

Here’s what to watch for:

1. Profit without liquidity. Positive net income but a shrinking cash position month to month.
2. Customers taking longer to pay. A sign that your invoicing or credit policy needs tightening.
3. Expanding stock levels. Inventory rising faster than sales.
4. Surprise tax or supplier bills. Poor forecasting or unclear ownership of responsibilities.
5. Overreliance on short-term credit. Using overdrafts or loans to patch gaps rather than plan ahead.

If you recognise these symptoms, review cashflow monthly (weekly if growth is rapid) and forecast the timing of when money actually arrives and leaves.

You can’t fix what you can’t see. Visibility is the first defence.

Summary

Founders often celebrate profitability as a milestone, but a sustainable business is one that can pay its people, suppliers, and taxes on time.

Founders who make liquidity part of the mission, and talk about cash as openly as revenue, build trust and control.

Profit tells you you’re doing something right. Cashflow tells you if you’ll survive long enough to prove it.

In part two of this series we’ll explore how to turn this awareness into action: the systems, habits, and incentives that make liquidity a strength, not a risk.