The tradeoff between corporate liquidity and profitability can be shown with a simple example that applies to businesses large and small. Consider that your business has strong monthly revenues which are holding steady at, for example $100,000. The operating margin is also holding steady at 10%. This makes your monthly variable and fixed costs equal $90,000. Now suppose that a new client wants to test your product for the next month, offering you about $20,000 in sales. After the trial, if this client is satisfied, he will triple his orders in the following months. This offers a great deal of potential growth for your company.
The economics of this situation tell a bit of a different story. While the operating margin is just 10%, the additional income in sales for the monthly trial client also means an additional operating profit. But you will need to spend an additional amount on variable costs for that month. Because this client has a Net 30 contract, you will not get any of that money back until the following month.
Just because you have profitability does not mean that you have liquidity, and vice versa. Having profitability without liquidity means that your company is successful, but you may not be able to manage your monthly debts and obligations without juggling your cash flow a bit. Your working capital management team should be able to accurately calculate and forecast your cash flow to make sure that you not only show a profit, but have liquid funds, as well. Working capital management is the key to balancing liquidity and profitability.