How can a company be profitable and still run out of cash?

Profit and cash are measured differently. The income statement books revenue when it's earned and costs when they're matched to that revenue. Cash only moves when money actually changes hands. So a company can report a profit and still watch its bank balance fall. There are four usual reasons. The first is receivables. The company sells on credit, books the revenue, and waits to collect. The second is inventory. It pays for stock now, and that cost only reaches the income statement when the goods are sold. The third is capital spending. Buying equipment takes the cash up front, but the income statement only shows a slice of it each year as depreciation. The fourth is debt. Repaying principal uses cash and never touches the income statement. Only the interest does. So I'd look at the cash flow statement, not just the income statement, to see where the cash is going.

Profit and cash are measured differently. The income statement books revenue when it's earned and costs when they're matched to that revenue. Cash only moves when money actually changes hands. So a company can report a profit and still watch its bank balance fall. There are four usual reasons. The first is receivables. The company sells on credit, books the revenue, and waits 60 or 90 days to collect. The second is inventory. It pays for stock now, and that cost only reaches the income statement when the goods are sold. The third is capital spending. Buying equipment takes the cash up front, but the income statement only shows a slice of it each year as depreciation. The fourth is debt. Repaying principal uses cash and never touches the income statement. Only the interest does. Here's a quick example. A company has net income of $10 million. It's growing fast, so receivables go up by $8 million and inventory by $6 million. Depreciation adds back $3 million, so cash flow from operations is negative $1 million. Then it spends $5 million on new equipment and repays $4 million of a loan. That's $10 million of cash out in a year with $10 million of profit. If it started with $8 million in the bank, it's $2 million short. That's why this happens most often to fast-growing companies. Every new sale needs receivables and inventory funded before the customer pays, so growth itself eats cash. The fix is usually in working capital or financing: collect faster, hold less stock, or arrange a credit line before it's needed. With a real company, I'd look at the cash flow statement first and compare cash flow from operations with net income over a few years.