Profitable And Still Out Of Cash

A few years back I worked with a founder who had everything a spreadsheet would call a win.

Revenue climbing. Margins healthy. Orders coming in faster than he could fill them.

And he could not make payroll without sweating it.

He kept asking the question every founder in that spot asks. If the business is profitable, where is the money?

The answer was never going to be in his P&L.

Profit and cash are not the same thing

Most founders know that in theory. Very few have priced what the gap actually costs them.

Profitability answers one question. How much do we keep after costs.

Working capital answers a different one. How much cash gets trapped in the business before a customer pays us.

That trapped cash has a name. I call it the Cash Void.

Every dollar of new sales pulls cash out before it pays cash back. You fund materials, production, labor, freight, supplier deposits. Then you carry the receivable while the customer takes 30, 60, sometimes 90 days to pay. All of that cash leaves before the revenue arrives.

The Cash Void is the size of that gap. Here is how you measure it.

Working Capital as % of Sales = Net Working Capital / Revenue

For operating decisions, use the tighter version:

Operating Working Capital = Accounts Receivable + Inventory - Accounts Payable

Divide that by revenue. The result tells you how much cash each dollar of sales locks up before it comes back.

What it looked like in practice

Back to the founder.

He brought me an order he was proud of. $100,000 in revenue. 35% gross margin. $35,000 of gross profit on paper.

On margin alone, an easy yes.

Then we looked at what the order demanded before any cash came back.

• Materials: $30,000

• Production: $20,000

• Freight and fulfillment: $5,000

• Other direct costs: $10,000

$65,000 had to leave the business before the customer paid a cent.

That timing is the whole problem. He collected on delivery. Nothing came in until the order shipped, so he financed the full $65,000 himself and waited.

He should have been paid upfront. If the customer funds the order at the start, that cash covers the materials, the production, the freight. The Cash Void closes. Same order, same margin, and the founder is no longer acting as his customer's bank.

So the order produced $35,000 of profit and demanded $65,000 of cash to get there. Not because of the work. Because of when he got paid.

A founder looking at margin says this is a good order. A CFO asks the harder question. Can the business afford to carry this order until it turns into cash?

Those are not the same question. The first asks whether the sale is worth doing. The second asks whether the business can survive doing it.

Now scale it

Say that founder wants to grow from $3M to $6M. Good goal. The cost of the goal depends entirely on how much working capital each sale requires.

At 10% of sales tied up in working capital, $3M of growth needs $300,000 of additional cash. Manageable.

At 30% of sales, the same $3M of growth needs $900,000.

Same revenue. Same goal. Three times the cash burden. One version is fundable. The other one quietly breaks the company.

Here is where it gets dangerous. Run the math the way most founders do. Grow revenue by $3M, hold a 20% net margin, expect $600,000 of new profit.

But if that growth requires $900,000 of working capital, the real picture is this. $600,000 of profit, minus $900,000 of cash absorbed by the growth, leaves $300,000 of cash strain.

The business made money on paper and lost cash in reality. Profitable and running out of room, at the same time.

Growth plan (on $3M of new revenue) Profit created Working capital needed Net cash effect 20% margin, 10% working capital $600K $300K +$300K 20% margin, 30% working capital $600K $900K -$300K 10% margin, 30% working capital $300K $900K -$600K

Same growth in every row. Different cash physics.

When you can carry it

None of this means you walk away from every cash-heavy order. Sometimes you take the risk on purpose. The question is whether you have the financial backbone to carry it.

Backbone means a real cushion. Cash reserves, a clean balance sheet, room to absorb the gap without flinching. Not optimism. Not a good month. Actual capacity.

Here is where most founders get hurt. The cash gets tied up, and then it sits. Inventory parked for more than three months will quietly kill a business. The founder runs short, so he goes outside for liquidity. A line of credit. A factoring arrangement. A lender. An investor on terms he would never accept on a calm day.

That money is not free. And its cost almost never makes it into the original math.

Go back to the order. 35% gross margin looked clean. But carry $65,000 for 90 or 120 days on borrowed money, and the financing cost comes straight out of that margin. Sometimes it takes a point or two. Sometimes it takes the whole profit. Either way, the founder priced the order as if the cash were free. It never was.

The test to run before you commit

Put your profit margin next to your working capital as a percentage of sales.

If your margin sits comfortably above your working capital burden, growth creates cash. Healthy.

If the two are roughly equal, growth creates accounting profit and almost no liquidity. You feel busy and broke. Risky.

If your working capital burden is higher than your margin, growth consumes cash faster than it builds the company. Every win makes the problem worse. Dangerous.

Most founders never run this test. They look at margin, see green, and step on the gas.

The point

The founder I started with did not have a revenue problem. He had a working capital problem that looked like one.

Once we sized the Cash Void, the fix was almost embarrassing in how simple it was. He started collecting upfront. Deposits on the large orders, payment before production on the rest. The customer's cash funded the order instead of his.

From there the rest got easy. Which orders to chase. Which to reprice. Where to renegotiate supplier terms. None of it was complicated. It just required looking at the right number.

So before you commit to your next growth target, run the test.

Profit tells you whether growth is attractive. Working capital tells you whether growth is fundable.

Most founders only check the first one. The second is the one that ends companies.

The Cash Void is one of seven places cash hides in a growing business. I wrote up the other six.

Cruz