Working Capital and the Cash Conversion Cycle

"Profitable but bankrupt" sounds contradictory, but it's a real pattern. Understanding working capital helps explain why it happens. Working capital is current assets minus current liabilities. It's a measure of whether a company has enough short-term resources to cover what it owes soon. A more precise tool for tracking this is the Cash Conversion Cycle (CCC). This includes Days Inventory Outstanding (how long inventory sits before being sold), plus Days Sales Outstanding (how long it takes to collect cash after a sale), minus Days Payable Outstanding (how long the company takes to pay its suppliers).

A long, positive CCC means cash is tied up for a while. Inventory sits on shelves, and invoices wait to be paid. This can happen even while the income statement shows a profit. A fast-growing company may see receivables and inventory increase faster than cash comes in. This consumes cash reserves, even with healthy net income. That’s how a fast-growing, accounting-profitable company can face a real liquidity crisis.