October 2018.

A successful SaaS company with:

  • $10M annual revenue
  • 20% profit margins
  • 200 happy customers
  • Growing 30% year-over-year

Filed for bankruptcy.

How?

They were profitable on paper but bleeding cash in reality.

The problem:

  • They paid suppliers in 30 days
  • Customers paid them in 90 days
  • Meanwhile, they needed cash for payroll, servers, and growth

The math was simple:

For every $100 in new sales:

  • They spent $60 upfront (servers, onboarding, support)
  • They got paid $100 three months later
  • Net: $40 profit… eventually

But “eventually” requires cash to survive the wait.

They ran out before “eventually” arrived.

This is the difference between profit and cash flow.

Profit is accounting. Cash flow is survival.

Let’s learn the metrics that keep you alive.

Part 1: The Profitable Bankruptcy - How It Happens

Most founders think:

“If we’re profitable, we’re safe.”

Wrong.

Here’s why profitable companies die:

Scenario: The Growth Trap

Fast-growing company:

  • $100K monthly revenue
  • $80K monthly costs
  • $20K monthly profit (20% margin)

Sounds great, right?

But let’s look at the cash flow:

January:
- Send $100K in invoices (payment due in 60 days)
- Pay $80K in expenses (due immediately)
- Cash position: -$80K

February:
- Send $110K in invoices (growing 10% MoM)
- Pay $88K in expenses
- Still waiting on January's revenue
- Cash position: -$168K

March:
- Send $121K in invoices
- Pay $96.8K in expenses
- Receive January's payment: +$100K
- Net cash position: -$164.8K

You're PROFITABLE but RUNNING OUT OF CASH.

The paradox:

The faster you grow, the more cash you burn.

Because:

  1. You pay expenses today
  2. You collect revenue tomorrow
  3. Growth accelerates the gap

This is called “growing broke.”

%%{init: {'theme':'dark', 'themeVariables': {'primaryTextColor':'#fff','secondaryTextColor':'#fff','tertiaryTextColor':'#fff','textColor':'#fff','nodeTextColor':'#fff'}}}%% graph TD A[New Customer Signs Up] -->|Day 1| B[Pay Expenses Immediately] B -->|Day 1| C[Server costs, salaries, onboarding] A -->|Day 60| D[Send Invoice] D -->|Day 90| E[Finally Get Paid] B -->|Cash Flow Gap| F[Need Bridge Capital] F -->|If None Available| G[Bankruptcy Despite Profitability] style G fill:#8b0000 style E fill:#1e4620

Solution: Understand and monitor your cash flow metrics religiously.

Part 2: Burn Rate & Runway - The Survival Clock

Every startup has a countdown timer:

The runway.

When it hits zero, you’re dead.

The Basic Formula (That Most Founders Get Wrong)

Simple version:

$$ \text{Monthly Burn Rate} = \text{Monthly Expenses} - \text{Monthly Revenue} $$

$$ \text{Runway (months)} = \frac{\text{Cash on Hand}}{\text{Monthly Burn Rate}} $$

Example:

  • Cash on hand: $500K
  • Monthly revenue: $50K
  • Monthly expenses: $100K
  • Burn rate: $100K - $50K = $50K/month
  • Runway: $500K ÷ $50K = 10 months to live

But this is WRONG for most companies.

Why?

Because it assumes:

  1. Revenue and expenses are consistent (they’re not)
  2. Cash is the same as revenue (it’s not - remember collection delays)
  3. You’ll spend uniformly until you die (you won’t - you’ll try to cut costs)

The Correct Burn Rate Formula

Cash-based burn rate:

$$ \text{Monthly Cash Burn} = \text{Cash Outflows} - \text{Cash Inflows} $$

Not revenue minus expenses. Actual cash movements.

Real example:

Month 1:
Revenue (invoiced): $100K
Cash collected: $60K (from old invoices)
Expenses (accrued): $80K
Cash paid: $90K (includes old bills)

Accounting burn: $100K - $80K = -$20K (profitable!)
Cash burn: $60K - $90K = -$30K (burning cash!)

Your runway calculation should use -$30K, not -$20K.

The Three Types of Burn Rate

1. Gross Burn Rate $$ \text{Gross Burn} = \text{Total Monthly Operating Expenses} $$

What it tells you: How much you’re spending to operate

2. Net Burn Rate $$ \text{Net Burn} = \text{Monthly Revenue} - \text{Monthly Expenses} $$

What it tells you: Whether you’re profitable (negative = burning cash)

3. Cash Burn Rate (the one that matters most) $$ \text{Cash Burn} = \text{Monthly Cash Out} - \text{Monthly Cash In} $$

What it tells you: How fast you’re depleting your bank account

When Burn Rate Becomes Critical

Rule of thumb:

12 months of runway = RED ALERT

Why?

Raising capital takes 6+ months. You need time to:

  • Create pitch deck (1 month)
  • Get meetings (2 months)
  • Do pitches (2 months)
  • Close deal (2-4 months)

If you wait until 6 months of runway, you’re negotiating from desperation.

Investors smell it. Your valuation suffers.

Smart founders:

  • Track runway weekly
  • Start fundraising when runway = 18 months
  • Have 12+ months of runway when closing the round

The Growth Dilemma

%%{init: {'theme':'dark', 'themeVariables': {'primaryTextColor':'#fff','secondaryTextColor':'#fff','tertiaryTextColor':'#fff','textColor':'#fff','nodeTextColor':'#fff'}}}%% graph LR A[High Burn Rate] -->|Good| B[Aggressive Growth] A -->|Bad| C[Inefficient Operations] D[Low Burn Rate] -->|Good| E[Capital Efficient] D -->|Bad| F[Too Slow - Competition Wins] style B fill:#1e4620 style E fill:#1e4620 style C fill:#8b0000 style F fill:#8b0000

High burn isn’t always bad if:

  • You’re acquiring customers efficiently (good LTV:CAC)
  • You’re in a winner-take-most market
  • You have funding runway
  • Growth is compounding

High burn is deadly if:

  • You’re burning to stay alive, not to grow
  • Unit economics don’t work
  • You’re running out of runway
  • You’re hoping to “figure it out later”

Part 3: Cash Conversion Cycle - How Fast Can You Turn Operations Into Cash?

The Cash Conversion Cycle (CCC) measures:

How many days your cash is tied up in operations.

Formula:

$$ \text{CCC} = \text{DIO} + \text{DSO} - \text{DPO} $$

Where:

  • DIO = Days Inventory Outstanding
  • DSO = Days Sales Outstanding
  • DPO = Days Payable Outstanding

Let’s break it down:

DIO (Days Inventory Outstanding)

How long inventory sits before being sold:

$$ \text{DIO} = \frac{\text{Average Inventory}}{\text{COGS per day}} = \frac{\text{Inventory}}{\text{COGS}} \times 365 $$

Example:

  • Average inventory: $100K
  • Annual COGS: $730K
  • DIO = ($100K ÷ $730K) × 365 = 50 days

Interpretation: Your inventory sits for 50 days before being sold.

Lower is better (except if it causes stockouts).

Typical benchmarks:

  • Grocery stores: 15-20 days
  • Fashion retail: 90-120 days
  • SaaS/services: 0 days (no inventory)

DSO (Days Sales Outstanding)

How long it takes to collect payment after a sale:

$$ \text{DSO} = \frac{\text{Accounts Receivable}}{\text{Revenue per day}} = \frac{\text{Accounts Receivable}}{\text{Revenue}} \times 365 $$

Example:

  • Accounts receivable: $150K
  • Annual revenue: $1.8M
  • DSO = ($150K ÷ $1.8M) × 365 = 30 days

Interpretation: Customers take 30 days to pay on average.

Lower is better.

Typical benchmarks:

  • B2C: 0-7 days (credit cards)
  • B2B SaaS: 30-45 days
  • Enterprise: 60-90 days

DPO (Days Payable Outstanding)

How long you take to pay your suppliers:

$$ \text{DPO} = \frac{\text{Accounts Payable}}{\text{COGS per day}} = \frac{\text{Accounts Payable}}{\text{COGS}} \times 365 $$

Example:

  • Accounts payable: $80K
  • Annual COGS: $730K
  • DPO = ($80K ÷ $730K) × 365 = 40 days

Interpretation: You pay suppliers in 40 days on average.

Higher is better (but don’t damage relationships).

Putting It Together: Cash Conversion Cycle

$$ \text{CCC} = \text{DIO} + \text{DSO} - \text{DPO} $$

Using our examples:

$$ \text{CCC} = 50 + 30 - 40 = 40 \text{ days} $$

Interpretation:

Your cash is tied up for 40 days.

Meaning:

  • You spend money on inventory/operations
  • 40 days later, you get paid
  • For 40 days, your cash is locked up

The shorter your CCC, the better your cash flow.

The Magic of Negative CCC

Dell Computer in the 1990s-2000s:

  • DIO: 4 days (build-to-order, minimal inventory)
  • DSO: 30 days (customers paid by credit card immediately)
  • DPO: 60 days (negotiated long payment terms with suppliers)

Dell’s CCC:

$$ \text{CCC} = 4 + 30 - 60 = -26 \text{ days} $$

Negative CCC = They got paid BEFORE paying suppliers.

This means:

Day 0: Customer orders laptop, pays $1000
Day 4: Dell builds laptop from inventory
Day 30: Dell receives $1000 from credit card processor
Day 60: Dell pays suppliers for parts

Dell had $1000 in the bank for 30 days before paying suppliers.
They used OTHER PEOPLE'S MONEY to grow.

This is why Dell scaled so efficiently.

They turned the cash conversion cycle into a growth engine.

%%{init: {'theme':'dark', 'themeVariables': {'primaryTextColor':'#fff','secondaryTextColor':'#fff','tertiaryTextColor':'#fff','textColor':'#fff','nodeTextColor':'#fff'}}}%% graph LR A[Customer Orders] -->|Day 0| B[Customer Pays $1000] B -->|Day 4| C[Dell Builds Laptop] B -->|Day 30| D[Cash in Bank] C -->|Day 60| E[Pay Suppliers] D -->|30 Days| F[Use Cash for Growth] style F fill:#1e4620 style D fill:#1e4620

How to Improve Your CCC

Reduce DIO:

  • Just-in-time inventory
  • Better demand forecasting
  • Drop shipping models

Reduce DSO:

  • Require upfront payment
  • Offer discounts for early payment (2/10 net 30)
  • Automate collections
  • Use stricter credit terms

Increase DPO:

  • Negotiate longer payment terms
  • Pay on the last possible day (but maintain relationships)
  • Use credit cards for small purchases (float period)

Real numbers:

Improving CCC from 60 days to 30 days for a $5M revenue company:

Cash freed up:

$$ \text{Cash Impact} = \frac{\text{Annual Revenue} \times \text{CCC Improvement}}{365} $$

$$ = \frac{$5M \times 30}{365} = $410,959 $$

You just freed up $411K in working capital without raising a dime.

Part 4: Working Capital & Liquidity Ratios

Working capital is your financial cushion.

Formula:

$$ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} $$

Current Assets: Cash, receivables, inventory (things you’ll convert to cash within 12 months)

Current Liabilities: Payables, short-term debt, accrued expenses (things you owe within 12 months)

Example:

  • Current assets: $500K (cash: $200K, receivables: $250K, inventory: $50K)
  • Current liabilities: $300K (payables: $200K, short-term debt: $100K)
  • Working capital: $500K - $300K = $200K

Interpretation: You have $200K cushion for operations.

Current Ratio

The classic liquidity metric:

$$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} $$

Using our example:

$$ \text{Current Ratio} = \frac{$500K}{$300K} = 1.67 $$

What it means:

For every $1 you owe in the next 12 months, you have $1.67 in assets to cover it.

Benchmarks:

  • < 1.0: Danger zone (can’t pay short-term obligations)
  • 1.0-1.5: Tight but manageable
  • 1.5-3.0: Healthy (sweet spot)
  • > 3.0: Too conservative (cash sitting idle)

Industry variations:

  • Retail: 1.5-2.0 (need inventory buffer)
  • SaaS: 2.0-4.0 (high cash, low liabilities)
  • Manufacturing: 1.5-2.5

Quick Ratio (Acid Test)

A stricter test - removes inventory:

$$ \text{Quick Ratio} = \frac{\text{Cash + Marketable Securities + Accounts Receivable}}{\text{Current Liabilities}} $$

Why remove inventory?

Inventory takes time to sell and convert to cash. In a crisis, you need liquid assets.

Using our example:

$$ \text{Quick Ratio} = \frac{$200K + $250K}{$300K} = 1.50 $$

Benchmarks:

  • < 0.5: Crisis (can’t pay immediate obligations)
  • 0.5-1.0: Risky
  • > 1.0: Healthy

The quick ratio is MORE important than current ratio for:

  • Companies with slow-moving inventory
  • Service businesses (should be similar to current ratio)
  • Distressed companies
  • Fast-changing markets

Why Cash Flow ≠ Profit

Let’s destroy this myth with a real example:

Scenario: E-commerce company

Q1 Accounting (Accrual Basis):
Revenue: $1M (shipped products)
COGS: $600K
Gross profit: $400K
Operating expenses: $300K
Net profit: $100K

Q1 Cash Flow (Cash Basis):
Cash collected from sales: $700K (30% still owed)
Cash paid for inventory: $650K (bought extra for Q2)
Cash paid for expenses: $320K (includes some Q4 bills)

Cash flow: $700K - $650K - $320K = -$270K

Result: $100K profit but $270K cash burn!

Key differences:

Accounting Cash Reality
Revenue when earned Cash when received
Expenses when incurred Cash when paid
Includes depreciation Excludes non-cash items
Ignores timing All about timing

This is why you can be:

  1. Profitable but cash-negative (growing fast, long collection cycles)
  2. Unprofitable but cash-positive (pre-payments, deposits, negative CCC)

Operating Cash Flow vs Free Cash Flow

Operating Cash Flow (OCF):

$$ \text{OCF} = \text{Net Income} + \text{Non-cash Expenses} + \text{Changes in Working Capital} $$

What it measures: Cash generated from core business operations

Free Cash Flow (FCF):

$$ \text{FCF} = \text{Operating Cash Flow} - \text{Capital Expenditures} $$

What it measures: Cash available after maintaining/growing the business

Example:

Company financials:
Net income: $100K
Depreciation (non-cash): $20K
Increase in receivables: -$50K (cash tied up)
Decrease in payables: -$30K (paid down bills)

OCF = $100K + $20K - $50K - $30K = $40K

Capital expenditures (new equipment): $60K

FCF = $40K - $60K = -$20K

Interpretation:

  • OCF = $40K: Core business generates cash
  • FCF = -$20K: After reinvestment, burning cash

For investors, FCF is the ultimate metric.

It shows: Can this business sustain itself and return cash to shareholders?

Part 5: Real Case Studies

Case Study 1: Tesla’s 2018 Cash Crisis

Situation:

  • Q1 2018: Tesla burning $1 billion per quarter
  • Cash on hand: $2.7 billion
  • Runway: 2.7 quarters (8 months)

The numbers:

Q1 2018:
Operating cash flow: -$398M
Free cash flow: -$1,048M
Cash burn rate: $350M/month

Elon Musk’s response:

“Tesla will be profitable and cash-flow positive in Q3 & Q4.”

Everyone doubted.

What they did:

  1. Cut CapEx by 50% (delayed factory expansion)
  2. Accelerated Model 3 production (revenue growth)
  3. Reduced working capital (collected deposits faster)
  4. Tightened expense controls

Results:

Q3 2018:
Operating cash flow: +$1,389M
Free cash flow: +$881M
Net income: +$312M

Tesla went from 8 months of runway to profitable.

Key lesson: Cash crisis can be solved by:

  • Growing revenue (faster collections)
  • Cutting CapEx (delay investments)
  • Improving working capital (CCC optimization)

Case Study 2: Theranos Warning Signs

Elizabeth Holmes raised $700M. Yet Theranos died.

The cash flow red flags that investors missed:

Red flag #1: Revenue vs Cash Collection

2014 Reported:
Revenue: $100M (projected)
Actual: $100K

Cash collected: Nearly zero

Red flag #2: Burn Rate

Monthly burn: $15M
Revenue: Negligible
Runway: Dependent on constant fundraising

Red flag #3: Working Capital Deterioration

2015:
Current ratio: 0.8 (liabilities > assets)
Quick ratio: 0.3
DSO: Infinite (customers weren't paying because tech didn't work)

Red flag #4: Negative Operating Cash Flow

Operating cash flow: -$150M annually
No path to positive OCF
Burning cash to stay alive, not to grow

Key lesson: Monitor these metrics:

  • If DSO is increasing rapidly → customers aren’t paying (bad product/service)
  • If current ratio < 1 → can’t pay bills
  • If burn rate is constant but revenue isn’t growing → zombie company

Part 6: Your Monthly Cash Flow Checklist

Track these metrics weekly or monthly:

Survival Metrics (Weekly)

  1. Cash Balance

    • Target: 12+ months of runway
    • Alert threshold: < 6 months

  2. Weekly Cash Burn

    • Formula: Cash out - Cash in
    • Compare to budget

  3. Runway

    • Formula: Cash ÷ Monthly burn
    • Update weekly

Health Metrics (Monthly)

  1. Current Ratio

    • Target: 1.5-3.0
    • Alert: < 1.2

  2. Quick Ratio

    • Target: > 1.0
    • Alert: < 0.8

  3. Cash Conversion Cycle

    • Track: DIO, DSO, DPO
    • Target: Minimize CCC

  4. DSO (Days Sales Outstanding)

    • Track trend
    • Alert: If increasing rapidly

  5. Working Capital

    • Should grow with revenue
    • Alert: If decreasing

Operating Metrics (Monthly)

  1. Operating Cash Flow

    • Target: Positive
    • Track: Trend toward positive

  2. Free Cash Flow

    • Target: Break-even → positive
    • Ultimate health indicator

Dashboard Template

Monthly Cash Flow Dashboard
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━

SURVIVAL
  Cash Balance:        $850K  ✓
  Monthly Burn:        -$70K  ⚠
  Runway:              12.1 months  ✓

LIQUIDITY
  Current Ratio:       2.1x   ✓
  Quick Ratio:         1.4x   ✓
  Working Capital:     $420K  ✓

EFFICIENCY
  Cash Conv. Cycle:    35 days  ✓
  DSO:                 28 days  ✓
  DIO:                 12 days  ✓
  DPO:                 45 days  ✓

CASH GENERATION
  Operating Cash Flow: +$15K  ✓
  Free Cash Flow:      -$25K  ⚠

✓ = Healthy  ⚠ = Monitor  ✗ = Crisis

Key Formulas Reference

Burn Rate & Runway: $$ \text{Cash Burn Rate} = \text{Monthly Cash Out} - \text{Monthly Cash In} $$

$$ \text{Runway} = \frac{\text{Cash on Hand}}{\text{Monthly Cash Burn}} $$

Cash Conversion Cycle: $$ \text{CCC} = \text{DIO} + \text{DSO} - \text{DPO} $$

$$ \text{DIO} = \frac{\text{Inventory}}{\text{COGS}} \times 365 $$

$$ \text{DSO} = \frac{\text{Accounts Receivable}}{\text{Revenue}} \times 365 $$

$$ \text{DPO} = \frac{\text{Accounts Payable}}{\text{COGS}} \times 365 $$

Liquidity Ratios: $$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} $$

$$ \text{Quick Ratio} = \frac{\text{Cash + Receivables}}{\text{Current Liabilities}} $$

Working Capital: $$ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} $$

Cash Flow: $$ \text{Operating Cash Flow} = \text{Net Income} + \text{Non-cash Expenses} ± \text{Working Capital Changes} $$

$$ \text{Free Cash Flow} = \text{Operating Cash Flow} - \text{CapEx} $$

The Bottom Line

Profit is opinion. Cash is fact.

You can manipulate profit through accounting choices.

You can’t manipulate your bank balance.

The companies that survive:

  1. Monitor cash flow weekly
  2. Maintain 12+ months runway
  3. Optimize their cash conversion cycle
  4. Understand the difference between profit and cash
  5. Keep current ratio > 1.5

The companies that die:

  1. Focus only on revenue and profit
  2. Ignore collection timing
  3. Grow faster than their cash can support
  4. Wake up when runway = 3 months
  5. Think “we’re profitable” = “we’re safe”

Your action items:

  1. Calculate your runway today
  2. Build the monthly dashboard template above
  3. Track DSO, DIO, DPO to calculate CCC
  4. Set alerts for current ratio < 1.5
  5. Review cash flow every Monday

Remember:

Revenue is vanity.

Profit is sanity.

Cash is reality.

Stay liquid. Stay alive.

Next in series: Growth Metrics: Viral Loops, Retention & Sales Efficiency — Learn how to measure and optimize your growth engine with viral coefficients, retention cohorts, and sales efficiency metrics.

Previous: Profitability Metrics: Beyond ‘Are We Making Money?’ — Master the hierarchy of profitability metrics and learn when margins matter.

Part of the Business Math Series — Master the numbers that drive business success.