Cash Flow vs. Profitability: Understanding the Difference Could Save Your Business
Mel Archbould
Business Growth, Exit or Succession : Mentor & Advisor to Business Owners & Leaders : NED : Speaker : Former MD for 17 yrs : Family-Owned Business Expert : Chair at Nexus Leaders East Midlands
Running out of cash is every business owner's nightmare. But did you know there’s a big difference between running out of cash because you’re growing too fast and running out of cash because your business is making losses?
When I was running our engineering business, I experienced this firsthand. It’s not always easy to tell the difference, and like many business owners, I found myself asking: “Why is there no money in the bank when we’re working harder than ever?”
Here’s what I’ve learned:
Growth Without Enough Working Capital
When you’re growing quickly, your expenses—like stock, hiring, or even larger premises—start to rise faster than the cash from your sales comes in. This is a working capital issue. Your business might actually be profitable, but the timing of cash flowing in and out creates a crunch.
Signs to watch for:
??Increasing turnover, but you’re struggling to pay suppliers or wages.
??Waiting longer for customers to pay their invoices.
??Needing to borrow more to meet daily expenses.
Making Losses
On the other hand, running out of cash because your business is losing money means your core operations aren’t profitable. You’re spending more than you’re earning, and the problem won’t be fixed by growth alone. In fact, scaling up while making losses can make the situation worse.
Signs to watch for:
??Negative gross profit margins (costs of sales are higher than your income).
??Struggling to cover fixed costs, even during steady sales periods.
??Dipping into reserves or borrowing to cover everyday operations.
Why It Matters
The solution depends on the cause. If it’s growth-related, better cash flow management or funding options like invoice financing can help. But if losses are the root, it’s time to revisit pricing, costs, and strategy before scaling up.
This distinction is critical, but many owners don’t spot it until it’s too late—I know I didn’t at first. That’s why I’m so passionate about helping businesses navigate these challenges now.
Get in touch if you would like to talk through this in more detail.
Expert Providers of Wastewater Solutions | Specialists in Rail and Marine Industries | Managing Director at Servac International Marine Technologies Ltd
2 天前It's a challenge when you haven't got a specific finance department/employee, we can't do everything which is why it's good to have someone on hand to crunch those numbers like you.
We turn your unsellable business into a market-ready asset, unlocking & realising its true value | 30 Years Coaching CEOs & Leadership Teams | Business Valuation Expert | M&A | Succession & Exit Advisory | DiSC | NED
2 天前Mastering the cash flow conversion cycle—turning inputs into cash predictably—is the secret sauce. Positive, predictable cash flow? That’s knowing your lagging and leading indicators and consistently steering them toward growth. Your experience speaks Mel!
The Executives Coach ?? Developing Brilliant C&D Suite Execs & Senior Leadership Teams Skills To Lead Brightly ??Imposter Syndrome Specialist ??#1 Best Selling Author?? Keynote Speaker ?? Mum ?? F1 Nut
2 天前How often is the cash deficit due to inefficiencies Mel? I'd think probs quite often??
Barrister at Law | Corporate & Commercial Law |Connecting UK Legal & HR teams to top offshore talent | Legal & HR Off-shoring Expert
2 天前Understanding the root cause of cash flow issues is crucial for any business. It’s the first step to lasting solutions!
Executive Coach and Mentor, Chair, Board Director, Consultant, Author, Public Speaker, Lecturer | Coaching & Mentoring for First-Time CEOs at Grey Area Coaching | Founder/Director of David Roche Enterprises Ltd
2 天前Spot on - so important!