Why profitable companies fail on cash flow – and how to spot it in time | numericky.cz

Profitable companies hit a liquidity squeeze because profit and cash are two different things. Accounting books a profit at the moment of invoicing, but the money only appears in the bank account once the customer pays. In the meantime, payroll, VAT and loan payments go out on a fixed calendar, while collections arrive with a delay. This creates what is known as a cash gap, which the company has to bridge somehow, even though it is formally “in profit”. According to the EU Payment Observatory, suppliers in the EU were paid by businesses on average in 61.8 days in 2023, and in 2024 some 69% of companies in the Czech Republic felt the impact of late payments.¹² You can spot the risk from three numbers: DSO, the cash conversion cycle and a 13-week outlook.

Your accountant congratulates you on the profit. You wake up wondering what you will pay the VAT from. Both are true – and that is exactly the problem. Profit and cash are two different things. And most companies that fail do not fail because they were not earning, but because they ran out of cash before the payments arrived.

What a profitable company running out of cash looks like

A construction company, CZK 42 million in annual revenue. 12 employees, a backlog of orders a year ahead. In February it signs a CZK 8 million contract at an 18% margin. At first glance, a good deal.

In March it invoices CZK 2 million. Costs are CZK 1.5 million. The accountant records a profit of CZK 500 thousand.

The reality in the bank account looks different:

→ Payroll leaves the account on 25 March – CZK 380 thousand.
→ The materials supplier has 14-day terms – CZK 920 thousand.
→ VAT is due on 25 April – CZK 500 thousand.
→ The customer pays the invoice in 60 days – the money arrives in May at the earliest.

The company needs to pay CZK 1.8 million within 30 days. The collection arrives in 60 days. Cash gap: CZK 1.5 million, which it has to find somewhere – even though it is “in profit”.

If the bank does not lend quickly and on reasonable terms, the profitable company hits a payment shortfall. Not because it runs the business badly. Because no one showed it in time what would happen in the bank account 4 weeks out.

This is not the exception. It is the pattern.

According to the relevant institutions, late payment and pressure on liquidity rank among the main causes of corporate failures. The EU Payment Observatory reports that suppliers in the EU were paid by businesses on average in 61.8 days in 2023, and that in the Czech Republic a total of 69% of companies felt the impact of late payments in 2024. Allianz Trade expects a fifth consecutive year of rising insolvencies, most of all in construction, retail and services. CRIF recorded a record 16,063 companies wound up in the Czech Republic in 2023. The common denominators tend to be the same – not a lack of profit, but missing cash at the right time.

The cause is almost always the same: the company grows, but cash cannot keep up. Receivables grow faster than collections. Inventory ties up capital. Operating costs run on a fixed calendar – payroll, VAT, loan payments – while income arrives with a delay that no one measures precisely.

Three numbers that tell you whether it is happening to you too

DSO (Days Sales Outstanding) – how many days on average you wait for the customer to pay. According to the EU Payment Observatory, suppliers in the EU were paid by businesses on average in 61.8 days in 2023, and in 2024 payment terms deteriorated further. If your DSO is well above that range, you are financing your customers out of your own pocket – and you probably do not know it. → How to reduce DSO and release locked-up cash

CCC (Cash Conversion Cycle) – how many days the entire cycle takes, from paying the supplier to collecting from the customer. As a rough guide, from our practice, for mid-sized Czech companies it runs into the tens of days. Shortening the cycle by 10 days releases over CZK 2.7 million of working capital at a company with CZK 100 million in revenue. → How to calculate and shorten the CCC

A 13-week cash flow forecast – an outlook that shows you the problem 6 to 8 weeks before it hits. With this forecast, the construction company from the example above would have seen the cash gap in February – not in March, when it is already too late. → Why large investment groups make no decisions without a 13-week forecast

Why a monthly report from the accountant is not enough

The accountant does exactly what they should: taxes, VAT, the balance sheet, the P&L. You get the report on the 15th to 20th of the following month. You make decisions in January based on November data.

But cash flow does not wait for the monthly close. Payroll, loan payments, VAT – these are fixed outflows on a precise calendar. Income from customers arrives with a variable delay. The problem arises when these two streams diverge – and the monthly report shows it to you only after they already have.

Financial management means seeing ahead. Knowing today what will happen in the bank account in 6 weeks. And having time to react – to talk to the bank, push on collections, postpone an investment.