Profitability and Liquidity, in Studying Good Profitable Company, that suffers from Lack of cash, as a result, it pays a lot of money for Overdraft. Do you think it could be normal?

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In a company that has a great profitability and lack of cash this means  a bad management of cash-flow  And/Or unaccepted polices in  recording the Revenues .. let`s see different reasons that lead to this problem ;

 

1-Expanding of getting fixed assets by a big numbers of cash without enough study

2- Giving very big period of credit for customers or client while getting shorter period from vendors

3- Stoling  of money or products And/Or  no efficiency in using the financial resource.

4- Mistakes in recording and recognizing the revenues in the books and records that enlarge the number of revenues by mistakes

5- Very bad policies in Collections the accounts Receivables

6- Using very high bank interest fees system in getting Overdraft.

 

Thank You

 

Yes , definitely it is normal. Meanwhile let's explain on financial terms.

Financial management is based on building on a business’s strengths while striving to overcome its weaknesses.  Financial analysis helps answer questions such as: Is the business improving from year to year? Have we borrowed too much? Are we making a decent return for our shareholders?

1-Profitability ratios  

It measures the returns generated on sales and investment.

The long-term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders.  It is these ratios that can give insight into the all important "profit".  Bear in mind though, that profit does not equal cash, given your understanding of the cash flow statement.

2-Liquidity ratios

It judges whether a business is likely to run out of cash in the short term .

Your business must be able to meet its short-term debts when they fall due.  Many profitable businesses have failed because they grant too much credit to customers and then cannot pay salaries and suppliers without going over their overdraft limits.  Bankers are paid to ensure that their clients can repay their loans, and so can be expected to be conservative in their lending. 

it's a bad management of working capital.Company with low profits can survive if they have cash and some times the company with huge profits but no cash to meet there requirements cannot survive.

wait more details from our experts

 

Thanks for inviting

Profitability and liquidity are both different terms in accounts, If a company has earned good profit and has good liquidity still the company may go for overdraft, yes because the amount might not be realised from debtors or the amount realized may have been invested in some other business or investment so it is possible that even after good profitability company may go for overdraft because of week cash flow. 

Yes, it could be normal The liquidity position of a firm to meet it obligation when the become due to pay off cause the ability is reflected the conclusion regarding liquidity position. Overall profitability financial position of a firm the management is concerned about that to meet it for overdraft, short term and long term obligation. To ensure that it could be normal reasonable return to its owner and secure optimum utilization of the asset of the firm, this is possible....

This would depend on the company and how it manages its cash revenues, and trusting its costumers to pay, there is also how the company manages its suppliers this can be done with a risk assessment.  

In profitable company, Cash flow can be arranged easily by management if they're serious and give priority to its reputation. Trying to exchange services, beside respecting contracts and agreed terms of payments are keys of continuous success, more profitable, and better cash flow.

No it is not a normal phenomenon, however the situation could be improved by taking corrective measures in admin, cash handling, contract/ agreements, security and other management policies.  

The first thing to decide in this Question is "WHAT IS NORMAL IN THIS SCENARIO?"

In my opinion, a company having good profitability should have sufficient cash to meet its obligations in short and medium term. But, if this is not, it is not normal. 

The profitability and liquidity are two separate indicators. A company may have good profitability but may lack in cash due to bad working capital management . The situation may lead to question on its survival. The company having low profits may survive if it has sufficient cash to meet its obligations.

Thanks.

 

To avoid pays extra money for overdraft to be taken below action:

1.      To maximum utilize of manpower & fixed assets.

2.      To minimum incise of fixed assets.

3.      To avoid warehousing extra inventory  

4.      To try some credit facilities from vendor to purchases any products, raw materials or fixed asset.

5.      To try maximum cash sales to customer and if necessary to credit sales it’s must be short term credit.