Profit is not cash.
can we deliver what we sold for less than the customer is paying?
Once somebody is willing to buy, the next question seems straightforward: can we deliver what we sold for less than the customer is paying? If the answer is yes, we have a profit. But we may still have a problem.
A business can sell something for 100 that costs 70 to deliver and appear to make 30. If most of the 70 has to be paid today and the 100 arrives three months from now, the arithmetic may be right while the business runs out of money.
The difference is timing.
This becomes more important as a business grows. More orders can mean more inventory, more people, larger supplier payments and more working capital before the corresponding cash arrives. Revenue can be growing, margins can look healthy, and the bank account can be moving in the opposite direction.
The same problem appears in larger businesses and transactions. EBIT may look attractive, but it is not necessarily money available to the owner. Interest has to be paid. Equipment needs replacing. Taxes arrive. Working capital moves. Debt has to be serviced. Some of what appears to be earnings is already spoken for.
So perhaps the useful question is not simply whether a business makes a profit, but what happens to that profit on its way to becoming cash. How much arrives, when does it arrive, and how much has to leave before it does?
This is also why growth is not always the cure for a weak business. If every additional unit of revenue requires more cash to be committed before the customer pays, rapid growth can increase the problem rather than solve it.
None of this makes profit unimportant. Without sound underlying economics there is little to convert into cash in the first place.
But profit and cash answer different questions.
Profit tells us whether the economics of what we are doing can work.
Cash tells us whether we can keep doing it.
A business needs both.