Ask a founder how their business is doing and they’ll talk about revenue, clients, and deals. Ask them about working capital and you’ll get a blank stare.
But working capital is what keeps the lights on. It’s the cash available to cover day-to-day operations — payroll, rent, suppliers, taxes — while you wait for clients to pay.
Run out of working capital and it doesn’t matter how profitable you are. The business stops.
What Is Working Capital?
Working capital is the difference between your current assets and current liabilities:
Working Capital = Current Assets – Current Liabilities
Current assets include:
- Cash in the bank
- Accounts receivable (money clients owe you)
- Inventory
- Prepaid expenses
Current liabilities include:
- Accounts payable (money you owe suppliers)
- Wages payable
- Tax obligations
- Short-term debt
If working capital is positive, you can cover your obligations. If it’s negative, you’re in trouble.
Why Growing Companies Run Out of Working Capital
This is the paradox of growth: the faster you grow, the more working capital you need.
Here’s why:
- You hire before new revenue arrives
- You buy inventory before it’s sold
- You deliver services before clients pay
- You pay VAT on invoiced revenue, not collected cash
A company growing 50% year-over-year might need 50% more working capital. If that cash isn’t available, growth stalls — or kills the business.
The Working Capital Cycle
Every business has a working capital cycle — the time between paying for inputs and collecting cash from outputs.
Working Capital Cycle = Inventory Days + Receivable Days – Payable Days
Example:
- You buy materials and pay in 30 days (payable days: 30)
- It takes 15 days to produce and deliver (inventory days: 15)
- Client pays in 45 days (receivable days: 45)
Cycle = 15 + 45 – 30 = 30 days
This means you need to fund 30 days of operations from your own cash before money comes back. The longer the cycle, the more cash you need.
5 Ways to Improve Working Capital
1. Get Paid Faster
- Invoice immediately after delivery, not at month-end
- Offer early payment discounts (2% for paying within 10 days)
- Require deposits or milestone payments
- Follow up on overdue invoices weekly, not monthly
2. Negotiate Better Payment Terms with Suppliers
- Ask for net-60 instead of net-30
- Consolidate purchases with fewer suppliers for leverage
- Pay on the last day of terms, not earlier
3. Manage Inventory Tightly
- Don’t overstock “just in case”
- Track inventory turnover monthly
- Clear slow-moving stock at a discount rather than holding it
4. Forecast Your Cash Needs
A 13-week cash flow forecast shows you exactly when working capital will be tight. You can plan ahead instead of scrambling.
5. Arrange a Credit Line Before You Need It
Banks lend when you don’t need money. Get a revolving credit facility in place while your balance sheet looks healthy.
Working Capital for Different Business Models
| Business Type | Typical Challenge | Solution |
|---|---|---|
| Services (B2B) | Long payment terms (net-45 to net-90) | Milestone billing, deposits |
| E-commerce | Cash locked in inventory | Just-in-time ordering, dropshipping |
| SaaS | High upfront acquisition costs | Annual prepayment discounts |
| Manufacturing | Long production + payment cycles | Invoice factoring, supply chain financing |
Red Flags
- Receivable days increasing — clients are paying slower
- Inventory growing faster than revenue — you’re overstocking
- Relying on credit cards or overdraft for daily operations
- Asking for payment extensions from suppliers
If you see any of these, your working capital management needs attention immediately.
How We Help
At John Galt Finance, we analyze your working capital cycle in the first week. We identify exactly where cash gets stuck and build a plan to free it up.
Most clients recover 10-30 days of cash within the first month just by optimizing payment terms and invoicing processes.
Book a free consultation and we’ll map your working capital cycle.