Why profitable companies stumble: profit vs. liquidity

Profit is an accounting figure in the income statement; liquidity is the cash actually available to pay salaries, rent and suppliers. The gap between them is a common reason profitable businesses stumble.

Where does the gap come from?

• Credit sales: you record revenue when you sell, but cash only arrives when you collect.
• Inventory: goods you buy cost cash today and only turn into profit when sold.
• Buying assets: equipment or vehicles take a lot of cash without all of it showing as an expense that month.
• Zakat and taxes: amounts due on fixed dates that may fall in a weak month.

How do you protect your cash?

1. 1Prepare a cash flow forecast for the next three months and update it monthly.
2. 2Set a clear collection policy and follow up on overdue receivables weekly.
3. 3Don't buy more inventory than your sales cycle needs.
4. 4Keep a cash reserve that covers your fixed expenses for several months.