Which scenario might lead a profitable company to declare bankruptcy?

A profitable company can still face significant challenges that may lead it to declare bankruptcy, even if it shows strong revenues and profit margins. The scenario of "inability to collect cash from customers" directly addresses a critical aspect of financial health: cash flow. Profitability measures income versus expenses but does not reflect the timing of cash inflows. If a company has high sales and profits on paper but struggles to collect payment from customers, it may not have sufficient cash on hand to meet its short-term obligations, such as payroll, rent, and debt repayments.

This lack of liquidity can lead to a cash crunch, where the company might find itself unable to operate effectively despite its underlying profitability. Consequently, prolonged collection issues can force a company to seek bankruptcy protection to reorganize its debts and manage its cash flow more effectively.

Other scenarios, such as having a large cash reserve, high revenue with low expenses, and reduced operational costs, indicate financial stability and typically support the ongoing operations of a business rather than contribute to bankruptcy. However, a critical cash flow problem can undermine even a seemingly successful company, illustrating the importance of managing receivables alongside revenue generation.