Working capital is the cash a business has tied up in its own operations: inventory on shelves, invoices waiting to be paid, and the supplier bills you have not settled yet.
The cash conversion cycle
The number that matters is how many days pass between paying for your inputs and collecting from your customer. A manufacturer that pays suppliers in 30 days, holds inventory 60 days and collects in 45 has a 75-day cycle — 75 days of every sale's cash locked inside the operation.
Every day you shave off that cycle is money released without a single new sale. A 10 percent discount that pulls customers from net-45 to net-15 terms is a working-capital decision, not a pricing one.
Why profitable companies run out of money
Growth consumes working capital. Each new hire is paid monthly; their output bills quarterly. Each new contract means costs today and collection in 60 days. A company growing 30 percent a year can be handsomely profitable and still face a cash wall — the profit is real, the timing is not.
This is the trap that catches second-stage companies, and it is why 'profitable' and 'bankrupt' are not opposites. It is also the specific gap that invoice factoring and working-capital lines exist to bridge.
How to free some up this quarter
In order of speed: chase receivables with a real process (weekly ageing review, a phone call, not a statement); stretch payables to the terms you already have; sell obsolete inventory at cost; and re-quote customer terms so new contracts carry deposits instead of net-60.
- Weekly receivables ageing review, not monthly
- Deposits on new contracts, not milestone-60 billing
- Use the payment terms you already negotiated
- Inventory at cost beats inventory on shelves
Frequently asked questions
How much working capital do I need?
A common heuristic is two to three months of operating expenses in accessible cash or credit. Contract-heavy businesses should add a buffer equal to the largest single receivable.
Is negative working capital bad?
Not always — Amazon ran on it for years by collecting before paying. It is powerful and dangerous: it means your suppliers are financing your growth, and it reverses fast if sales dip.
Sources
Connectica provides information only, not financial, investment, legal or tax advice. Figures on this page are estimates and generalizations — confirm anything that matters with the relevant professional or authority.