Why a profitable company can fail — and how to prevent it
Let me tell you a story that happens more often than it should.
Mr. Jorge owns a construction materials distribution company. Business is going well: Last year, the company generated COP 8 billion in sales and achieved a 12% profit margin. In other words, it earned nearly COP 1 billion on paper. Yet on an ordinary Tuesday in March, Mr. Jorge calls his accountant in distress: He does not have enough cash to pay Friday’s payroll.
How is that possible? If the company is making money, why does it not have money?
The answer has a name: Working capital. And understanding it is probably one of the most important differences between a business that lasts — and one that does not.
First: What Is Working Capital, in Simple Terms?
Forget technical language for a moment. Think of your business as a restaurant kitchen.
For that kitchen to operate every day, you need:
- Ingredients in the refrigerator (inventory)
- Customers who still owe you money (accounts receivable)
- Suppliers you still have to pay (accounts payable)
- Some cash available for unexpected expenses
Working capital is, simply put, the money your business needs to stay alive and operating day to day. It is not the money used to buy the building, trucks, or shelves. It is the money constantly moving: It comes in through sales, goes out to pay suppliers, comes back in when customers pay you, and repeats again and again.
The Basic Formula
Working Capital = What I can turn into cash soon – What I must pay soon
If the first number is greater than the second, you can breathe.
If the second is greater than the first, you suffocate.
It is that simple.
The Story of the Three Timelines
Here is where it gets interesting. Working capital is not a static number — it is a moving cycle. And that cycle has three stages:
Stage 1: Inventory
You purchase merchandise. The money that was once in your bank account is now “sleeping” in the form of products sitting in the warehouse. It earns nothing. It does not pay payroll. It simply waits to be sold.
The longer inventory remains unsold, the worse it is for your business.
Stage 2: Selling on Credit
A customer arrives, buys your product, but asks for 30, 60, or 90 days to pay. You delivered the goods. You no longer have the merchandise. But you do not have the cash either. What you have is a promise that says: “They owe me.”
That promise is called accounts receivable. Although it appears as an asset on the balance sheet, in practical terms it is money you cannot use today.
The longer customers take to pay, the worse it is for your business.
Stage 3: Paying Suppliers
You also owe money to your supplier. They gave you 30 days to pay. Until you pay them, that money stays in your pocket.
The longer you can take to pay suppliers — without damaging the relationship — the better it is for your business.
The Critical Moment: When Working Capital Turns Into Cash
Here is the concept many business owners do not fully understand — and the one that separates those who sleep peacefully from those who do not:
Working capital is trapped money. Cash conversion is the moment that money is released and returns to your pocket.
Let us go back to Mr. Jorge, the construction materials distributor:
- He buys cement and stores it in the warehouse. → His money becomes trapped in inventory.
- He sells the cement to a construction company on 60-day credit terms. → His money becomes trapped in accounts receivable.
- Sixty days later, the construction company pays him. → His money returns to cash.
During all that time — which may be 90, 100, or even 120 days — that money is not available. It does not pay payroll. It does not pay rent. It does not pay taxes. It is working inside the business, but it is not accessible.
Meanwhile: Payroll still arrives on the 15th and 30th. Rent is still due on the 5th. DIAN still collects taxes on schedule. No one waits.
That is why Mr. Jorge, who “earned COP 1 billion,” still does not have enough cash to cover payroll. That COP 1 billion is spread across full warehouses and customers who have not paid yet.
The Number Every Business Owner Should Know: Cash Conversion Cycle
There is a simple metric that tells you, in one number, how efficiently your working capital is performing. It is called the Cash Conversion Cycle (CCC). It answers one very practical question:
“From the moment I spend money to buy inventory, how many days pass before that money returns to my bank account?”
The Formula in Plain English
CCC = Inventory Days + Accounts Receivable Days – Accounts Payable Days
Example
| Concept | Days |
| Inventory turns every… | 45 |
| Customers pay on average in… | 60 |
| I pay suppliers in… | 30 |
| Cash Conversion Cycle | 75 |
his means Mr. Jorge needs to finance 75 days of operations with his own money — or with bank financing. If his company generates COP 8 billion in annual sales, that could represent approximately COP 1.6 billion permanently trapped just to keep the wheel turning.
That is the money that does not appear in the bank account — even when the business is profitable.
Why Is This So Important?
Because working capital is the oxygen of a business. And like oxygen, most people only notice it when it is missing.
de que existe cuando falta.
A company can have:
- Great products
- Great clients
- Strong margins
- An excellent team
…and still fail because of a lack of working capital. Because if the company cannot make payroll on Friday, it does not matter that COP 500 million will arrive on Monday. Friday is still Friday.
In fact, according to multiple business studies, the leading cause of failure among SMEs is not lack of profitability — it is lack of liquidity. In other words: Businesses were making money, but they did not have money at the right time.
Five Levers to Improve Working Capital
The good news is that once you understand the concept, there are practical actions that can improve it. Here are five of the most powerful:
1. Collect Faster
Review your credit policy. Do you really need to offer 60-day terms, or do you offer 60 days simply because “that is how it has always been done”? Consider: Early payment discounts Invoicing the same day goods are delivered A disciplined collections process
Every day you reduce in receivables is money returning to your pocket sooner.
2. Turn Inventory Faster
Inventory is idle cash. Identify which products move slowly — and why. Many businesses buy “just in case.” That “just in case” can cost millions in trapped capital.
3. Negotiate Better Supplier Terms
Your suppliers also sell to your competitors.If you pay reliably, you have negotiating power. Requesting 45 or 60 days where you currently receive 30 can release a significant amount of cash.
negociación. Pedir 45 o 60 días donde hoy le dan 30 puede liberar una cantidad enorme de caja.
4. Anticipate, Do Not React
Prepare a 13-week cash flow forecast. It is not complicated, and it can make the difference between spotting a problem one month in advance — or discovering it on Friday at noon.
5. Measure the Cycle Every Month
If you do not measure your Cash Conversion Cycle, you are flying blind. This metric should be part of your management dashboard, at the same level as sales and margin.
The Lesson
Profitability tells you whether your business model makes sense. Working capital tells you whether your business can keep operating tomorrow. Both matter. Yet many business owners only focus on the first.
Understanding working capital — and actively managing it — is what separates companies that grow sustainably from those that grow until they suffocate. Because yes, poorly managed growth can also suffocate a business: Selling more without managing working capital means more inventory, more receivables, and more cash trapped inside operations.
The business owner who understands this sleeps better. The one who does not, sooner or later, ends up calling the accountant on a Tuesday in March.
At Level Up Colombia, we help companies understand, measure, and optimize their working capital so that growth translates into cash — not stress. If you would like to know where your company’s money is currently “trapped,” let’s talk.
