Opinions expressed by Entrepreneur contributors are their own.
Key Takeaways
- Profit doesn’t equal liquidity. A company can be profitable while still struggling to pay its bills, usually because of how cash moves through the business.
- Underneath most cash flow problems is a poorly designed capital stack — the blend of funding sources that keep your business running (equity, retained earnings, debt and working capital facilities).
- Founders must use working capital tools to smooth operations, match growth investments with long-term capital, keep a liquidity buffer and establish capital relationships before they need them.
For many founders, “profitability” feels like the finish line. You’ve built something that finally sells more than it spends. On paper, everything looks healthy, margins are up, costs are under control, and growth is steady.
And yet, your bank balance tells a different story. Payroll’s tight. Supplier payments are late. You’re constantly juggling timing to avoid a shortfall.
How can a profitable business still run out of money? The answer sits at the intersection of cash flow and capital design.
Profit doesn’t equal liquidity
Profit is a measure of performance. Cash is a measure of survival.
A company can show substantial profits while still struggling to pay its bills, usually because of how cash moves through the business. The problem isn’t in the income statement; it’s in the timing.
Consider a B2B manufacturer doing $10 million a year in revenue with a 15% net profit margin. On paper, that’s $1.5 million in profit. But if the company offers 60-day payment terms, most of that cash is sitting in accounts receivable — money earned, but not yet received. Meanwhile, suppliers, rent and salaries demand real cash today.
That disparity produces what’s called a working capital shortfall, and it’s the quiet assassin of good businesses. In a U.S. Bank study, 82% of business failures were caused by inadequate cash flow management, not bad profitability.
The hidden problem: A weak capital stack
Underneath most cash flow problems is something deeper, a poorly designed capital stack.
Your capital stack is the blend of funding sources that keep your business running: equity, retained earnings, debt and working capital facilities. Each source has a cost and a time horizon. The problem arises when those timelines don’t match your business cycle.
Many founders make the mistake of using long-term capital for short-term needs or short-term loans for long-term projects.
That’s like using a 30-year mortgage to pay for groceries or a credit card to buy a factory. It works for a moment, but it breaks under stress.
A SaaS startup, for instance, might raise equity to cover customer acquisition costs. In reality, those costs could be financed with short-term, revenue-backed funding options.
The result of this mismatch? Unnecessary dilution and long-term cost.
How a smarter capital stack bridges the gap
To prevent profitable businesses from collapsing under cash pressure, founders must match the life of their capital to the life of their assets.
In simple terms:
This alignment turns profit into usable liquidity, ensuring that operational success doesn’t get trapped in accounting limbo.
Related: You’re Growing Fast — But Is Your Money Keeping Up? Here’s the Capital Strategy You Need.
1. Use working capital tools to smooth operations
Working capital is the heartbeat of your business. The faster it circulates, the healthier you are. Rather than employing equity to provide short-term cash liquidity, astute operators use flexible financing instruments planned for operational flow. Some of the common examples include:
1. Invoice financing: Spinning invoices for early payment
2. Revolving credit lines: Lending on receivables
3. Supplier credit: Negotiating longer payment terms
Software platforms such as Clearco and Pipe enable companies to release working capital from upcoming or outstanding revenue without forgoing ownership. This enables founders to scale without raising equity repeatedly or depleting profits.
2. Match growth investments with long-term capital
When funding expansion, new product lines, marketing pushes or acquisitions, use capital that mirrors the payback timeline. If a project will generate returns over 24 months, avoid financing it with a six-month bridge loan.
Venture debt and revenue-based financing are two modern solutions that effectively fill this gap. Companies like Capchase and Arc offer financing tied to predictable ARR (Annual Recurring Revenue), allowing founders to access capital that grows with their business rather than against it.
This approach not only stabilizes cash flow but also reduces dilution, a major win for profitable founders who don’t want to sell equity just to cover timing issues.
3. Keep a liquidity buffer
With a flawless stack, unforeseen delays and shocks occur with a late-paying customer, a supply chain glitch or a macroeconomic downturn. That’s why having a liquidity buffer is crucial.
Strive to keep two to three months of fixed operating expenses in reserve through:
1. Undrawn credit facilities
2. Short-term treasury investments
3. Pre-approved working capital lines
As Harvard Business Review has noted, firms with liquidity cushions not only get through downturns in better shape but also take advantage of opportunities when others are out of cash.
4. Establish capital relationships before you need them
The worst moment to seek capital is when you really need it!
By that point, your choices narrow and prices increase. Founders who maintain active relationships with banks, lenders and investors long before a crunch hits enjoy far more flexibility. They have the trust and transparency needed to secure capital on favorable terms.
Treat your financial relationships like strategic assets. Keep lenders updated with quarterly performance, forecasts and cash flow reports. In return, you’ll earn credibility, which often translates into extended limits or faster approvals when it matters most.
Related: 21 Ways Startups That Have Used Capital Efficiency to Stay Ahead
Profit isn’t the goal — capital efficiency is
In modern business, profit is only half the story. The real metric of strength is capital efficiency — how well your business converts capital into cash and cash into sustainable growth.
Most efficient companies:
-
Monitor working capital cycles closely
-
Design capital stacks that align with operational timelines
-
Keep liquidity on standby
-
And treat financing partners as part of their long-term ecosystem
That combination creates resilience and the ability to stay liquid, agile and scalable through growth and uncertainty alike.
Businesses rarely fail because their product isn’t good or because the market isn’t big enough. They fail because their financial architecture can’t handle the timing of growth.
A smart capital stack does more than fund operations; it aligns your financial rhythm with your business rhythm. It ensures profit becomes power, not paperwork.
In the end, profitability makes you successful. But a well-structured capital stack is what keeps you alive long enough to enjoy it.
Key Takeaways
- Profit doesn’t equal liquidity. A company can be profitable while still struggling to pay its bills, usually because of how cash moves through the business.
- Underneath most cash flow problems is a poorly designed capital stack — the blend of funding sources that keep your business running (equity, retained earnings, debt and working capital facilities).
- Founders must use working capital tools to smooth operations, match growth investments with long-term capital, keep a liquidity buffer and establish capital relationships before they need them.
For many founders, “profitability” feels like the finish line. You’ve built something that finally sells more than it spends. On paper, everything looks healthy, margins are up, costs are under control, and growth is steady.
And yet, your bank balance tells a different story. Payroll’s tight. Supplier payments are late. You’re constantly juggling timing to avoid a shortfall.
The rest of this article is locked.
Join Entrepreneur+ today for access.
