FinanceSheep | Free Financial CalculatorsWhy Does a Profitable Business Sometimes Run Out of Cash? | Free Calculator | FinanceSheep

Measuring Earnings🟢 Beginner

Why Does a Profitable Business Sometimes Run Out of Cash?

Why Accounting Profit ≠ Cash in Hand

Companies can show profits while running out of cash. Understanding the gap between accounting earnings and cash flows is critical for any valuation.

EBITDANet IncomeCash FlowAccrualsD&A

Live Result

$150

ƒ: net_income + DA - capex - delta_wcraw: 150.000

ƒ(x)

Use variable names from the panel above (e.g. FV, r, n) — or type numbers directly: 10000 / (1 + 0.08)^10

net_income$

Accounting net income (profit after all expenses and taxes)

net_income = 200

Depreciation & Amortisation (non-cash expense)

DA = 50

capex$

Capital expenditures — cash spent on new assets

capex = 80

delta_wc

Change in working capital (increase = cash outflow)

delta_wc = 20

💡 You can also enter values directly in the formula: 10000 / (1 + 0.08)^10

⬇ Export Calculation

Exports a plain .txt file with your expression, formula, all variable values, result, and educational notes — ready to paste into any report, Word doc, Notion, or Google Docs.

The exported file includes the formula in standard mathematical notation — you can paste it directly into Excel, Google Sheets, or back into FinanceSheep.

📖

Learn: Why Accounting Profit ≠ Cash in Hand

Measuring Earnings · Educational Guide

The Core Idea

A restaurant can show $100,000 of accounting profit while having $0 in the bank if customers owe money and new equipment was bought. Cash flow tells the real story of what a business actually has to spend.

How It Works

Accounting profit ≠ cash flow because of: (1) Non-cash expenses like depreciation (reduces profit but no cash leaves). (2) Accruals (record revenue when earned, not when collected). (3) Capital expenditures (cash leaves but not immediately expensed). Understanding EBIT → EBITDA → Free Cash Flow is the journey from accounting to economic reality.

💡

Real-World Example: Net income = $200M. Add back D&A (non-cash) = $50M. Subtract capex (cash spent on assets) = -$80M. Subtract working capital increase = -$20M. Free Cash Flow = $150M — less than the accounting profit suggests.

Why Does a Profitable Business Sometimes Run Out of Cash?

You might also need