Cash flow: why a profitable company can still go under
📌 In short: A company does not fail because it loses money: it fails because it can no longer pay. Those are two different things, and the gap between them has a name — working capital requirement. This article shows, on a worked example, how 60% revenue growth can absorb more cash than the company generates in profit — and why the permanent overdraft that follows is precisely what banking regulation watches for.
Keywords in this article
1. Profit and cash do not measure the same thing
The income statement records a sale on the day it is invoiced. Cash records it on the day the customer pays. Sixty or ninety days may pass between the two — during which the company has already paid its suppliers, its wages and its charges.
| Event | Effect on profit | Effect on cash |
|---|---|---|
| Sale invoiced, not yet collected | + revenue | none |
| Inventory purchased for cash | none until sold | − outflow |
| Depreciation charge | − expense | none |
| Repayment of loan principal | none | − outflow |
| Collection of an old receivable | none | + inflow |
Four of the five lines above affect only one of the two columns. That is why a company can post a positive net profit for three consecutive years and find itself unable to meet its payments.
📌 The formulation that sums it up: profit measures performance, cash measures survival. A company can survive for years without performing; it does not survive three months without cash.
2. Working capital requirement: the mechanics
Working capital requirement measures the money tied up by the operating cycle. It is calculated simply:
WCR = trade receivables + inventories − trade payables
Each of the three terms is driven by a period:
Trade receivables
The terms you grant your customers. Every day granted ties up one day of revenue.
Inventories
The time goods spend in the warehouse. Every extra day of turnover ties up one day of purchases.
Trade payables
The terms your suppliers grant you. It is the only term that finances you, which is why it is deducted.
A positive WCR means the operating cycle consumes cash permanently. That is not an anomaly — it is the case for almost all industrial and commercial companies. What matters is how much, and how it evolves.
3. The growth trap, demonstrated in figures
WCR grows mechanically with activity. If terms stay unchanged, a rise in revenue increases receivables and inventories proportionally — and the company must finance that increase before collecting the corresponding sales.
Here is the demonstration. Illustrative figures, with constant terms: customers 45 days of revenue, inventories 60 days of purchases, suppliers 30 days of purchases. Net margin of 5%.
| Scenario | Revenue | Purchases | Receiv. | Invent. | Payables | WCR | Δ WCR | Profit | Gap |
|---|---|---|---|---|---|---|---|---|---|
| Starting point | 120.0 | 70.0 | 15.00 | 11.67 | 5.83 | 20.83 | — | 6.00 | — |
| Growth +30% | 156.0 | 91.0 | 19.50 | 15.17 | 7.58 | 27.08 | +6.25 | 7.80 | +1.55 |
| Growth +60% | 192.0 | 112.0 | 24.00 | 18.67 | 9.33 | 33.33 | +12.50 | 9.60 | −2.90 |
Amounts in millions of DZD. "Gap" = net profit − increase in WCR.
What the table demonstrates
- At +30%, growth absorbs 6.25 out of 7.80 of profit: 80% of the profit goes into working capital. The company is profitable, yet generates almost no cash.
- At +60%, the increase in WCR (12.50) exceeds net profit (9.60). The company is more profitable than ever in absolute terms, and it destroys 2.90 million of cash over the year.
⚠️ This is failure through success. Nothing has been mismanaged: prices are good, margin is intact, customers pay. The only problem is that the company finances its customers and inventories faster than it collects. With no long-term resource behind it, that gap is filled by an overdraft — and that is where the second trap closes.
Is your growth financeable?
We calculate your actual working capital, project it at your growth rate, and determine the resource required before an overdraft sets in.
Get a cash flow diagnosis →4. The permanent overdraft: the signal your bank watches
Financing structural working capital with an overdraft is the most common reflex, and the most misunderstood. An overdraft is a short resource; working capital is a permanent need. The mismatch is not merely risky for the company: it is expressly targeted by banking regulation.
Regulation no. 14-03 of 16 February 2014 classifies as potential-problem claims:
📜 "debit balances on current accounts which, over a period of 90 to 180 days, have not recorded credit movements covering all interest charges and a significant part of those debit balances"
In other words: an account that stays in debit without ever clearing is downgraded to a classified claim without any payment incident. The consequence is immediate for the bank — a minimum provision of 20% instead of 1% per year — and it contaminates everything else: downgrading one claim triggers the downgrading of all the client's other claims.
The text also covers, in the same category, claims whose recovery becomes uncertain owing to financial deterioration, expressly citing excessive indebtedness and a significant fall in turnover. We set out these mechanisms in our article on what prudential rules force your bank to calculate about you.
🔎 Field observation (our engagements, not a regulatory text). Many owners discover this mechanism at the moment of a credit refusal, without ever having missed a payment. The diagnosis is then easy to make but slow to fix: the account must first start moving again, then time must pass. Managing working capital is incomparably cheaper than getting out of a classification.
5. Six levers, from the fastest to the most structural
Observations from our financial diagnosis practice, not regulatory provisions.
- Invoice faster. The time between delivery and issuing the invoice is pure working capital, entirely within your control and free to fix. It is always where to start.
- Chase before the due date. A reminder at D−7 costs a phone call; a reminder at D+45 costs a dispute. The effect on average customer terms is measurable within weeks.
- Segment payment terms. Granting the same terms to every customer means having good payers finance bad ones. Differentiating on payment history works better than a blanket tightening.
- Deal with dormant stock. Inventory that does not turn is tied-up cash costing interest every day. Clearing it, even at a reduced margin, releases cash immediately.
- Negotiate supplier terms before price. An extra thirty days reduces working capital as much as a discount of several points, without damaging the commercial relationship.
- Back structural working capital with a long-term resource. This is the only lever that addresses the cause. A permanent need must be financed by permanent capital — equity or medium-term credit — not by an indefinitely renewed overdraft.
The first five levers work within weeks and without external financing. The sixth requires a bank application, and therefore assumes the current account is not already in a classification situation — hence the order.
This article presents an analytical method and an example using illustrative figures; it constitutes neither legal advice, nor investment advice, nor a guarantee of results. Any decision must rest on the company's actual financial statements.
FAQ — Frequently asked questions
🔎 Sources and references
- Regulation no. 14-03 of 16 February 2014 on the classification and provisioning of claims and commitments by signature (OG 2014-56), Art. 5 (potential-problem claims), Art. 6 (contagion) and Arts. 9-10 (provisioning rates) — Bank of Algeria · Verified on 01/08/2026
- Regulation no. 14-02 of 16 February 2014 on large exposures and shareholdings (OG 2014-56) — Bank of Algeria · Verified on 01/08/2026
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