Why can a profitable company still run out of cash?
Model answer
Profit is accrual-based and ignores timing of cash. Cash can be trapped in growing receivables or inventory (working capital), drained by heavy capex, or consumed by debt repayments and interest - none of which fully show up in net income. Liquidity, not profitability, determines survival.
⚠ Common wrong answer: "Because of non-cash expenses like depreciation dragging it down." Why it fails: That is backwards — non-cash expenses make profit UNDERSTATE cash, not overstate it. The real culprits are cash trapped in receivables and inventory, heavy capex, and debt service, none of which fully hit net income.
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