When businesses fail, the reason is often misunderstood. Many people assume companies collapse because they aren’t profitable. In reality, far more businesses fail for a simpler (and more dangerous) reason: they run out of cash.
A company can be growing, winning customers, and even reporting profits, yet still be heading towards serious trouble if cash flow is mismanaged. This is why cash flow is often described as the silent killer of growing companies.
Profit doesn’t pay the bills, cash does
Profit is an accounting concept. Cash is real.
A business might record a sale today, but if the customer pays in 60 or 90 days, the cash doesn’t arrive immediately. Meanwhile, wages, rent, suppliers, software subscriptions and taxes all need to be paid on time.
This timing gap - known as the cash flow cycle - is where many fast-growing companies get caught out.
Crucially, growth often makes the problem worse, not better.
How growth can drain cash
Growth usually requires upfront spending:
- Hiring new staff
- Buying more inventory
- Investing in marketing
- Expanding systems or locations
If customers pay later than suppliers, every extra sale actually uses cash, rather than generating it. Businesses can find themselves profitable on paper but struggling to survive day to day.
This is where cash flow discipline becomes a strategic issue, not just an accounting one.
Case study 1: Profitable but cash-starved - the collapse of Thomas Cook |
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For decades, Thomas Cook was one of the most recognisable names in global travel. It had millions of customers, a strong brand, and continued to generate large revenues right up until its collapse in 2019. Yet despite this scale, the company ran out of cash. What went wrong? Thomas Cook’s biggest challenge was the timing and structure of its cash flows. The business faced several pressures at once:
While parts of the business appeared profitable, cash was constantly under strain. Why growth made things worse As the company expanded and restructured, it relied on refinancing and short-term funding to bridge cash gaps. Each year, survival depended more on securing new finance than on generating sustainable free cash flow. When lenders lost confidence and refused further support, the business had no cash buffer to fall back on. Thomas Cook collapsed almost overnight (whilst the original company failed, the Thomas Cook brand later re-emerged under new ownership.) Key lesson: Revenue can be strong and profits can exist - but if cash inflows don’t align with cash outflows, the business is vulnerable. |
Case study 2: Growth powered by cash discipline - Inditex (owner of Zara) |
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In contrast, Inditex, the global fashion group behind Zara, is often cited as a textbook example of cash flow management supporting growth. Despite operating in a highly competitive retail sector, Inditex has consistently expanded while maintaining strong cash generation. What did Inditex do differently? The company’s success is built on tight control of working capital:
As a result, Inditex often receives cash before it needs to pay suppliers - a highly advantageous position. Why this matters This cash-positive operating model means growth does not strain liquidity. New stores, new markets and new product lines can be funded largely from internally generated cash rather than debt. Even during economic downturns, strong cash reserves give the business flexibility and resilience. Key lesson: Businesses that master cash flow can grow faster, safer and with far less financial stress. |
Why cash flow forecasting matters
The difference between failure and success is rarely luck. It is planning.
A cash flow forecast helps managers understand:
- When cash shortages may occur
- Whether growth plans are affordable
- How sensitive the business is to delayed payments
- How much funding is genuinely required
Businesses that forecast cash proactively can act early - renegotiating terms, delaying expansion, or securing funding on their own terms.
Final thought
Revenue creates opportunity. Profit measures performance. Cash flow determines survival.
The contrast between Thomas Cook and Inditex shows that growth alone is not the goal. Sustainable success depends on whether a business can turn activity into cash - consistently and predictably.
For anyone studying business, understanding cash flow early is one of the most valuable lessons you can learn.
