A Business Can Be Profitable But Still Run Out of Cash
- If a company spends too much, doesn’t get paid on time, or fails to plan properly, it can end up struggling to pay the bills, even if it’s making money on paper.
- To avoid this, businesses need to cut unnecessary costs, speed up incoming cash, and find backup funding when needed.
Profit is an accounting measure, while cash flow is about real money in the bank.
Reducing Cash Outflows
- Negotiate better payment terms. Asking suppliers for longer payment terms gives businesses more time to collect cash before making payments.
- Delay major purchases. Holding off on expensive equipment or upgrades helps preserve cash, unless the delay impacts efficiency.
- Cut non-essential expenses. Reducing discretionary spending such as unnecessary software or excessive marketing, keeps more cash available for critical needs.
- Find lower-cost suppliers. Switching to more affordable materials or renegotiating contracts can reduce cash outflows without sacrificing quality.
If your supplier agrees to 60-day terms instead of 30, you gain more time to collect cash from customers.
ExampleA restaurant that switches to a more affordable supplier for packaging can lower costs without affecting food quality.
