One of the most common questions I hear from business owners is: "We're running out of cash. Why is this happening?"
Most people expect the answer to be found in the financial statements. They assume it's an accounting problem.
Sometimes it is. More often, it isn't.
After more than 25 years working with founder-led businesses, real estate developments, and companies facing financial pressure, I've found that cash rarely disappears overnight. It slowly leaks away through a series of decisions that, at the time, all seemed perfectly reasonable.
The financial statements tell you what happened. The real question is why it happened.
Cash Flow Problems Usually Start Long Before Cash Disappears
By the time a company starts struggling to make payroll or pay suppliers, the underlying problem has often been developing for months or even years.
Cash is usually the last thing to leave the building. Clarity disappears first.
When I begin working with a company, I'm not immediately looking at the bank balance. I'm trying to understand how the business arrived here. What decisions led to this point? What changed? Where did the company drift away from what originally made it successful?
The Most Common Cause: Drift
One of the concepts I talk about frequently is drift.
Drift is what happens when a business slowly moves away from its original purpose, strengths, or North Star. It rarely happens intentionally.
- –A new product line seems exciting.
- –A different market appears attractive.
- –An acquisition presents itself.
- –A founder's passion project starts consuming time and money.
Each decision seems logical on its own. Eventually the company looks very different from the business that originally became successful.
I've seen this happen repeatedly. One family-owned business had a profitable core operation that had quietly funded several side ventures over many years. The founder's personal wealth continually covered the shortfalls, making it difficult for management to recognize that parts of the business were never truly sustainable on their own.
Another manufacturing business developed an exciting new product line that captured everyone's attention. Research and development, management meetings and strategic planning increasingly focused on the new opportunity while the original flagship product gradually lost market share. Revenue declined while costs continued to rise.
Neither company ran out of cash because of one bad decision. They drifted there.
Revenue and Expenses Eventually Fall Out of Alignment
One of the things I look for early is whether revenue and expenses still make sense together.
- –Has overhead continued growing while revenue has flattened?
- –Is one division consuming resources without generating meaningful returns?
- –Are management's priorities still aligned with where the business actually earns its money?
Accounting software can show declining margins. It can't explain why those margins are shrinking. That's where understanding the people, incentives and decision-making behind the numbers becomes far more valuable than simply calculating ratios.
Growth Doesn't Always Solve a Cash Problem
Many owners assume the solution is simple: "We just need more sales."
Sometimes that's true. Quite often it isn't.
I've seen businesses accept low-margin projects simply to keep staff busy. I've seen companies attract customers who were never a good fit. I've seen exceptional salespeople who generated significant revenue while creating major problems throughout the rest of the organization.
Revenue can hide problems for a surprisingly long time. If the underlying cost structure isn't working, additional sales often delay the inevitable rather than solving it.
You can improve the bottom line in two ways: increase revenue, or reduce costs. Doing only the first may simply postpone the day you have to deal with the second.
Every Decision Carries a Cost
One lesson I've learned over the years is this: every business decision carries both benefits and costs.
Buying new equipment may increase production capacity. It also increases financing costs, maintenance, staffing requirements and management complexity.
Launching a new product creates new revenue opportunities. It also introduces inventory, purchasing, manufacturing and marketing costs that may not have existed before.
Just because you can do something doesn't necessarily mean you should. The important question is: what dominoes does this decision set in motion?
Thinking through those second- and third-order consequences helps prevent businesses from drifting away from their original purpose.
Complexity Is More Expensive Than Most Owners Realize
I made a similar mistake in my own investing career. My philosophy was simple: I just want to make money.
- –So I flipped houses.
- –Then I bought rentals.
- –Then I built new homes.
- –Then I renovated high-end properties.
- –Then lower-end properties.
- –Then short-term rentals.
Individually, many of those decisions made money — but not all. Looking back, I realized there wasn't an overarching investment philosophy holding everything together. Every new opportunity looked attractive because I hadn't clearly defined what I was trying to build.
That's another form of drift.
Sometimes The Dream Becomes Too Big
One of the most important lessons of my career came from working on a large entertainment development that eventually entered creditor protection.
People often assume the financial restructuring happened because the business temporarily ran out of money. Looking back, I don't think that's true. Even if additional financing had somehow delayed the restructuring, I believe the business would likely have faced the same problems a year or two later.
The original vision had simply become too large.
The project included ambitious expansion plans, additional entertainment facilities and multiple related developments. Individually, many of those ideas were exciting. Collectively, projected revenues could never realistically support the projected costs.
The turnaround required far more than finding additional financing. We restructured over $100 million of debt. The project was redesigned around a much smaller footprint. Projected costs came down. Projected revenues became realistic. A major strategic partner joined the ownership group.
Instead of trying to rescue the original dream, we built a business capable of sustaining itself. More than a decade later, it continues to outperform almost everyone's original financial projections.
The lesson wasn't that ambition is dangerous. The lesson was that ambition must remain connected to economic reality.
You Can't Predict the Future, But You Can Prepare for It
Many owners blame cash problems entirely on external events: interest rates, recessions, inflation, government policy, tariffs, competition. Others blame themselves for everything. Neither view is entirely accurate.
External events happen. Strong businesses still need to adapt.
Looking back at my own career, I spent years blaming myself for concentrating too heavily in one geographic market before a major economic downturn. Could I have predicted exactly when it would happen? No. Could I have diversified earlier or adjusted more quickly once conditions changed? Absolutely.
Leadership isn't about predicting the future. It's about recognizing reality sooner than everyone else and adjusting before your options disappear.
That's one reason I've always believed in getting in and out of projects relatively quickly. Time creates uncertainty. Markets change. Governments change. Partners change. The longer a project continues, the more opportunities there are for circumstances to change.
Preserve Your Options
Perhaps the most valuable principle I've learned is this: preserve optionality.
Every time a business loses flexibility, it becomes easier for circumstances to make decisions on its behalf.
- –Cash provides options.
- –Strong lender relationships provide options.
- –Focused operations provide options.
- –Simple business models provide options.
- –Healthy margins provide options.
Once those options begin disappearing, businesses become increasingly backed into a corner. Turnarounds become much more difficult.
The Darcy Principle
Businesses rarely run out of cash because of one catastrophic event. More often, they run out of cash because dozens of individually reasonable decisions slowly compound until the company loses focus.
The good news is that the same process can work in reverse. When leadership regains clarity — when complexity is reduced — when the business reconnects with its North Star — cash flow often begins improving as a result.
If your business is beginning to experience cash flow pressure, don't just ask where the money went. Ask why. The answer to that question usually determines the path forward.
