Why Profitable Companies Can Face Cash Crunch: The Paradox That Kills Businesses | Quick ₹eads

by Karnivesh | 22 January 2026

A finance director walks into the board meeting with the quarterly results. "Profit is up 25% year-over-year," she announces confidently. The board smiles. Investors celebrate. The stock rallies 5% on strong earnings. But that same evening, the CFO sits at his desk staring at the bank balance: ₹50 lakhs in cash, when ₹3 crores of vendor payments are due tomorrow. The company is profitable on paper and technically bankrupt in reality. How did this happen?

This paradox profitability coexisting with cash crisis kills more Indian businesses than any other single factor. Understanding why requires looking beyond profit and loss statements to the underlying mechanics of cash conversion and working capital management.

Profit Versus Cash: They're Not the Same Thing

This is the most fundamental misunderstanding in business finance. Profit is an accounting concept. Cash is reality. You can report ₹100 crores in profit while having ₹0 in the bank.

Here's how: A company makes a sale on credit, recognizing ₹100 crores in revenue immediately under accrual accounting. Costs of ₹60 crores are expensed. Profit appears to be ₹40 crores. But the customer hasn't paid yet. The company still owes ₹60 crores to suppliers who demand payment within 30 days. Cash flow is negative despite positive profit.

This timing mismatch between when profit is recognized and when cash actually arrives is the root cause of most cash crises in Indian businesses. Manufacturing firms, EPC contractors, IT services companies that extend credit to clients all operate with this inherent risk.

The Real Indian Cases

Ruchi Soya Industries perfectly illustrates this paradox. The company, once valued at ₹3,000+ crores, appeared profitable for years. But underneath, working capital was hemorrhaging. The company offered generous 90+ day credit terms to customers to drive sales growth. By 2017, ₹5,000 crores of receivables were locked up cash that was rightfully the company's but sitting in customer accounts.

Simultaneously, Ruchi Soya's debt load swelled to ₹9,000+ crores. The company was servicing debt at 10%+ interest rates while waiting 90+ days to collect cash from customers. The mathematics were brutal: borrowing at high rates to fund working capital, while receivables grew faster than collections. The company eventually filed for bankruptcy despite producing products customers wanted and paying for just with payment delays.

Yes Bank faced a different but equally catastrophic variant of this problem. The bank showed profits for years while NPAs (Non-Performing Assets) exploded silently in the background. When the rupee depreciated sharply in late 2019, mark-to-market losses on foreign currency exposures triggered a reckoning. Depositors rushed to withdraw. The bank, which appeared solvent on paper, suddenly faced a ₹40,000 crore outflow of deposits in weeks. The RBI imposed a moratorium in March 2020, capping withdrawals at ₹50,000 per account a dramatic signal of insolvency disguised as profitability.

Havells faced a similar crisis after acquiring Sylvania in 2007. The acquisition initially appeared successful. But when the 2008 global financial crisis hit, Sylvania's performance collapsed. Customers stopped paying promptly. Inventory piled up in a frozen market. Fixed costs (salaries, rent, facilities) continued regardless of sales. Havells was profitable in its domestic Indian business, but the consolidated picture was dire. Cash was burning at an unsustainable rate.

The Mechanics: How Profitability Masks Cash Crisis

The chart above reveals the mechanics. In a healthy company, revenue flows in quickly (30-day payment terms), expenses are paid, and the profit converts to cash. A ₹100 crore sale with 30-day collection cycles and ₹60 crore expenses becomes ₹40 crore in cash.

But in a cash-crunched company, the same ₹100 crore sale takes 90+ days to convert to cash. Expenses of ₹70 crores must be paid immediately. Working capital of ₹80 crores is locked in uncollected receivables. The company shows ₹30 crore profit but has a -₹50 crore cash position. This is the paradox: profitable on paper, bankrupt in reality.

The root causes cluster around timing mismatches. Rapid growth without adequate working capital creates "overtrading" the company grows revenue faster than it can fund working capital requirements. EPC contractors in India exemplify this: they bid aggressively for projects to win business, accept extended retention periods (holding back 10% of payments until project completion), and face 90+ day collection cycles. Revenue grows 30%, but cash requirements grow 40%.

Inventory buildup creates a second trap. A manufacturing company expects demand to accelerate, so it builds inventory. Demand disappoints. Cash is locked in unsold inventory while rent, salaries, and finance costs march on. The company is profitable (marking inventory at cost, not recording loss until sold) but cash-negative.

Debt servicing creates a third trap. Loan principal repayments don't hit the profit and loss statement they're balance sheet items. A company can show ₹50 crore profit while paying ₹60 crores in debt principal annually. Cash disappears, but profit looks good.

The Red Flags: Before Crisis Strikes

Several warning signs precede cash crises. Watch for Days Sales Outstanding (DSO) expanding unexpectedly. If a company historically collected payment in 45 days but now takes 75 days, working capital is deteriorating. Collections matter more than sales.

Monitor inventory turnover. If inventory days increase from 60 to 90 while sales are flat, cash is trapped in goods. For seasonal businesses, this is normal, but for non-seasonal sectors, it's a warning.

Track working capital as a percentage of revenue. For most Indian manufacturing, 10-15% is healthy. Above 25%, and the company is dangerously over-leveraged in working capital. Ruchi Soya reached 40%+ before collapse.

Watch cash conversion cycle—the number of days from when cash leaves your account (paying suppliers) to when it returns (collecting from customers). Add Days Payable Outstanding (DPO), Days Inventory Outstanding (DIO), and subtract DSO. A cycle above 90 days is dangerous for growth-stage companies.

Finally, monitor debt repayment schedules. A company with strong EBITDA but rising debt repayment obligations can have shrinking free cash flow despite growing profits.

The Investor's Playbook

Never rely on profit alone to evaluate financial health. Always analyze the cash flow statement. A company with rising profits but declining operating cash flow is deteriorating, not improving.

Compare operating cash flow to net profit. If a company reports ₹100 crore profit but generated only ₹20 crore in operating cash flow, the profit quality is suspect. Real profit converts to cash.

Calculate free cash flow (operating cash flow minus capital expenditures). This is the cash available for debt service, dividends, and growth. A profitable company with negative free cash flow is in decline.

Watch receivables closely. Growing receivables as a percentage of revenue signals collection issues. A company with ₹100 crore revenue and ₹40 crore receivables has 36% of annual revenue locked up a massive working capital strain.

The Bottom Line

Profit and cash are not synonyms. A profitable company can, and frequently does, face a cash crunch. This happens through timing mismatches (delayed collections), growth without working capital funding (overtrading), or debt obligations that consume cash without hitting the profit statement.

Indian businesses are particularly vulnerable because of sector dynamics: extended credit terms are standard in manufacturing and trade; government projects involve lengthy retention periods; and growth-stage companies often prioritize revenue over cash management.

The companies that thrive manage both profit and cash flow simultaneously. They collect receivables aggressively. They optimize inventory. They match their growth rate to available working capital. They avoid over-leverage.

The companies that fail chase profit while ignoring cash. They discover too late that a profitable sale paid 90 days from now doesn't help when vendor payments are due today. By then, it's bankruptcy, not turnaround.