Why a profitable business runs out of money

I spent thirteen years at J.P. Morgan Chase. I started as a business banker carrying 175 to 200 commercial clients, analyzing their financials and preparing their lending files alongside the underwriting and credit teams. I finished as an Executive Director over a market of 20 to 25 branches. Plenty of the businesses that came to me for money were profitable on paper and short of cash in practice. Most had not seen it coming.

Then I left banking, bought three stores and signed the guarantees myself. The arithmetic does not change when it is your name on the note. It is not a contradiction, and it is visible a quarter ahead in the right report. Most owners are reading the wrong one.

What the P&L cannot see

A profit and loss statement answers one question: did revenue exceed expense over a period now finished. Solvency is a different question on a different clock. Is there money in the account on the day money leaves it.

Three outflows never appear as expense.

• Debt principal. Interest is an expense. Principal is a balance sheet movement. A business can service its debt perfectly, print a clean P&L, and drain every month.
• Tax distributions. In a pass-through, the cash sent to owners to cover tax on profit the business earned leaves the account and never touches the income statement.
• Anything durable. Buildout, equipment, a lease deposit, inventory stocked ahead. Cash out today, expense spread over years or never.

Timing does the rest of the damage. Revenue is recorded when earned, cash arrives when it arrives, and payroll runs every other Friday regardless. Growth widens the gap, because each new dollar of revenue front-loads its cost.

Thirteen weeks

The instrument is a grid. Thirteen columns, one per week. A row for each category of money actually moving. Opening balance at the top, closing balance at the bottom, and each week’s close is the next week’s open.

Thirteen is the useful horizon. Past a quarter the forecast is a guess. Inside two weeks it is not a forecast, it is a reaction.

The one below is loaded with a business that earns money across the quarter and cannot make payroll in week six. Every white cell is editable.

Payroll lands every other week, rent monthly, and in week six a principal payment and a tax distribution land together. Nothing here is unusual. That is the point.

Read the bottom row

Find the first week the closing balance goes negative. That week is not the problem. It is the deadline. The weeks in front of it are the entire inventory of options you have left, and they are worth more the earlier you count them.

Four levers close a gap. They are not equal.

1. Timing. Move an outflow. Vendor terms, a discretionary purchase pushed one week right, a distribution taken after a collection instead of before it. Free, immediate, and usually sufficient.
2. Collections. The cheapest capital in any business is revenue already earned and not yet collected. Most owners have never asked for it precisely.
3. Financing. A line of credit, sized before it is needed.
4. Cost. Permanent, slow to take effect, and hard to reverse. Last for a reason.

What the committee sees

An owner who arrives with this forecast has answered underwriting’s real question before it is asked: does the person running this business know what is about to happen to it. The forecast does not have to be right. Forecasts are not right. It has to exist.

Most commercial lenders look for debt service coverage near 1.25×. That ratio gets computed with or without you. What you control is whether you walk in already knowing the answer.

Ask for the line while the numbers are good. A bank prices the file in front of it, and the same business is a different credit in week two than in week six.

Build it once

An afternoon to build, twenty minutes a week to maintain, no new software. A spreadsheet is correct. The only requirement is that the inputs be real, including the outflows nobody enjoys typing.

If you cannot name your tightest week, that is the work.