Profit Looks Fine. So Why Are We Out of Cash?

It’s one of the most frustrating moments in finance:

“Our P&L shows a profit… but the bank account is dry.”

Many business owners and CFOs in the Middle East have lived this moment — especially in fast-growing or import-heavy environments. This article explains the disconnect between profit and cash, shows how to diagnose it, and provides tools to prevent it from derailing your strategy.

📌 The Root Problem — Profit ≠ Cash

Profit is an accounting measure. Cash is a real-world constraint. The income statement may look great, but if receivables aren’t collected, inventory is bloated, or supplier terms have shifted, cash can vanish quickly — without ever showing up as a “loss.”

Let’s start with a basic example:

    Revenue:       10,000,000 USD
    COGS:          (6,000,000) USD
    Net Profit:     1,200,000 USD (after expenses)
    

But if AR rose by 2,000,000 USD and inventory increased by 1,000,000 USD… your **cash flow is negative**, even though you show a 1.2M profit.

🧠 5 Common Reasons Why This Happens

1. Slow Collections (High DSO): Your revenue is on paper, but cash hasn’t arrived. Common in Egypt, UAE, and Saudi B2B contracts.
2. Inventory Absorption: Your profits are sitting in stock. Many growing firms in FMCG and distribution suffer here.
3. CAPEX Overload: Big equipment purchases don’t show on P&L, but drain bank balances fast.
4. FX or Subsidy Losses: USD/TRY devaluation eats away at supplier payments or margin, silently eroding cash.
5. Unpaid Taxes or Dividends: Deferred obligations come due suddenly, shrinking working capital.

💡 Note: If you don’t have a rolling 13-week cash forecast, you won’t see this in time.

🧾 How to Diagnose the Problem (With Data)

Here’s what your finance team should check weekly:

• Cash Conversion Cycle: DSO + DIO - DPO
• Working Capital Trend: Change in (AR + Inventory - AP)
• Receivables Aging Report: % of receivables > 90 days
• Inventory Coverage Ratio: Inventory ÷ Average Monthly COGS
• FX Losses and Non-Operating Adjustments: Check in ERP cash flow report (indirect method)

📉 If any of the above trends rise while EBITDA is stable, you are leaking cash — quietly.

🛠️ What Reports You Need (and What to Change)

Most accounting systems hide these risks in “net working capital.” But here’s how to fix that:

✅ Build These Reports:

• Rolling Working Capital Report: Weekly change in AR, Inventory, and AP
• Cash Bridge from EBITDA to Net Cash: Shows where profit turns into (or doesn’t) cash
• CAPEX Tracker: Monthly planned vs actual + cash availability
• Collections Tracker: By client, by aging bucket, with escalation logic

💡 Recommended Tools:

• Power BI for trend dashboards
• Excel with ERP-linked queries for cash bridge automation
• ERP add-ons (Odoo, SAP, Oracle) for cash forecasting modules

📊 Case Study – “Why a $5M Net Profit Still Meant Cash Crisis”

A UAE construction firm had just posted 5M AED in net profit. But the owner was preparing to borrow at 12% interest to make payroll.

Our diagnosis revealed:

• Receivables up by 9M AED (90-day payment terms with 120-day actual)
• Advance inventory for 3 new projects — not reimbursed yet
• Deferred supplier payments due within 15 days

💥 In 3 weeks, the company recovered 4.5M in overdue receivables, postponed 2.1M in supplier payments, and implemented a weekly working capital dashboard.

“We had the data — we just weren’t looking at it the right way.”

🔚 Conclusion: Profit Is a Story. Cash Is Reality.

If your income statement looks great but you feel stress in the treasury — trust the cash. The disconnect is real, and it’s fixable with the right reports, habits, and reviews.

At VERTAS, we help finance teams connect FP&A and treasury, turning margin into mobility.

📩 Need help mapping your cash gap? Contact us here.