Working capital: the number that quietly runs your business

The working capital equation in plain terms

Take the invoices your customers haven't paid yet, add the stock and work in progress you're holding, then subtract the supplier bills you haven't paid yet. What's left is the cash your operations absorb just to exist. A figure of $150,000 means exactly that much of your money is permanently out on loan to your own business, funding the gap between paying for things and getting paid for them. Accountants sometimes define working capital more broadly off the balance sheet, but for day to day management this operating version is the one worth watching.

This is why growth strains cash so badly. Double your sales with the same payment terms and stock habits and you roughly double the cash trapped in the cycle. The profit's real, it just arrives later; the working capital demand turns up first. Plenty of businesses that fail during a growth spurt die of exactly this mechanism.

The cash conversion cycle: your money's lap time

The cash conversion cycle measures how many days a dollar spends trapped in the loop: the days your stock sits before selling, plus the days customers take to pay you, minus the days you take to pay suppliers. Here's an illustrative example for a products business.

In this example every dollar spent on stock takes 53 days to come home. Turn over $2 million a year and shortening that cycle by even a week releases a meaningful amount of cash permanently, not as a one off, because the loop keeps running continuously. That's cash without new sales, new debt or new investors.

Practical levers, in rough order of effort

• Invoice immediately: every day between finishing work and sending the invoice adds a day to your cycle for nothing. Same day invoicing is the cheapest working capital improvement there is.
• Tighten payment terms and follow up consistently: shorter terms on new customers plus a reliable reminder rhythm shave days off collections without any confrontation.
• Take deposits or progress payments on larger jobs so customers fund the work as it happens, rather than after.
• Right size stock: identify the slow movers, buy them less deeply, and stop reordering things whose only job is filling a shelf.
• Use supplier terms fully but respectfully: paying on the agreed date rather than early is free funding; paying late damages relationships and does something else entirely.

When working capital needs funding anyway

Some businesses run structurally long cycles: importers paying overseas suppliers upfront, manufacturers with long production runs, contractors carrying retentions. For these, even excellent management leaves a gap, and that gap is exactly what overdrafts, trade finance and invoice finance exist to bridge. Whether and how to fund it is a decision for you and your advisers, but make it from a clear measurement of the cycle rather than a recurring overdraft surprise. Interest on that funding is a genuine cost of the cycle too, which is one more reason shortening it pays twice.

Measuring it properly every month

Debtor days, stock days and the cash conversion cycle are standard inclusions in NextEra's monthly management reporting, so any movement shows up while it's still cheap to fix. Never had your own cycle measured? The Strategic Finance Review calculates it from your actual books and shows exactly where the cash is hiding.