Updated: Mar 9, 2022
Unprofitable businesses can exist for years as long as they have cash to pay their expenses every month. Pharmaceutical companies often spend five to ten years developing, testing and getting drugs approved before they ever generate a dollar in revenue by being heavily invested and having enough cash in the bank. On the other hand, profitable businesses often go bust very quickly because they run out of cash and can't pay the rent or wages for a month or two even though they are owed large sums by customers. Once a business is unable to meet its short-term commitments (falling due within 30 days) it is technically insolvent and must either re-finance or liquidate. Unless the owner is prepared to put some of their own money in as equity it is difficult to get investors or banks to put up cash when the business has become insolvent.
Because of the way most accounting software works, the P&L sees sales as soon as the order is received from the customer, not when the customer pays the invoice. In my product development business it would be entirely possible for a customer to place a tooling order with me for which I do not get paid by that customer for six to seven months. I would be effectively financing my customers business for six months, taking all the risk that the tooling factory, shipping company and injection molder all do what is expected of them and that my customer is still in business by the time the tooling is delivered. High risk, low reward, bad business. All the while my P&L will be reflecting the sales order I got at the start and showing a profitable business even though I could be running out of cash having paid all of the expenses associated with delivering the tooling. Making sure that you cover your outlays through staged payments for long lead time deliveries is critical to good cash flow management.