Profitability and Cash Flow: Why Profitable Companies Can Face Cash Shortages

This study examines the paradox of profitability versus liquidity, explaining why profitable companies can still face cash shortages. It analyzes the impact of working capital management, credit sales, inventory buildup, and capital expenditure on cash flow. The research highlights key differences between accrual-based profit and cash-based liquidity using financial ratios and practical examples from corporate finance. The findings are relevant for ACCA Financial Management students and professionals managing cash flow forecasting.

Keywords: Cash Flow, Profitability, Working Capital, Liquidity, ACCA