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Is it possible for a profitable business to fail? The answer is yes because even a profitable business can fail if it doesn’t maintain positive cash flow. Cash flow and profitably are two different measures in a business. Let’s do an example.

Suppose a DVD rental business has just started up. There was lots of inventory to buy (a selection of DVDs), equipment to buy or lease (Point of Sale equipment and anti-theft equipment) as well as store fixtures. They also have employees to pay and expenses to meet (such as rental and supply expenses).

Inventory and fixtures are usually carried on the books as assets and they don’t play into the profit picture until they’re sold or depreciated. If the DVD business is only looking at the Net Profit and not at the cash flow they may find themselves in a situation where there is not enough money in the bank account to pay employees and the bills at the end of the month. Bills can sometimes be extended, but employees won’t last very long if they don’t get paid on time.

That’s why it’s important for business managers and business principles to always be aware of the cash flow situation in a business. If cash runs low, corrective measures must be taken to bring cash back into the business such as a business cash advance or a business loan.

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