Is your profitable business actually dying?

Picture a manufacturer that reports healthy profits for three quarters in a row and then cannot pay its suppliers. It sounds impossible, yet it happens more often than most owners expect. The reason is simple: profit and cash are not the same thing.

Profit is not cash flow

The numbers on a profit and loss statement can be misleading on their own.

• The truth: a business can be profitable on paper and still fail because it does not have the cash to pay its bills, salaries and suppliers.
• The warning sign: when receivables pile up and inventory sits unsold, cash drains away faster than profits can replace it.

What the standards already tell us

1. AS 3 / Ind AS 7, Cash Flow Statements. The cash flow statement shows how much cash the business actually generates from its operations, separately from the profit it reports.
2. SA 570 (Revised), Going Concern. Auditors must evaluate whether it is appropriate to treat the business as a going concern, that is, able to keep operating for the foreseeable future. That judgement looks well beyond the profit figure.
3. Internal financial controls. Controls over receivables, inventory and payments keep working capital, and the cash conversion cycle, in check.

How your CA helps protect the business

• Check liquidity, not just profit. Measure the business's ability to meet its short-term obligations.
• Analyse collection cycles. Spot widening gaps between sales and the cash actually received.
• Set up cash dashboards. Regular cash monitoring that flags a coming cash crunch early, while there is still time to act.

Profit makes headlines, but cash flow determines survival. The businesses that come through downturns are not always the most profitable; they are the ones with disciplined cash management.