Working capital: why profitable growth can still run out of cash

Revenue growth can improve the income statement while putting pressure on cash. Working capital explains much of that tension.

Follow the operating cycle

Cash leaves when inventory, labor or services are funded. It returns when customers pay. The longer that cycle takes, the more capital the business must carry.

Receivables

Growing sales on generous terms can create a large accounts-receivable balance. Track days sales outstanding, overdue concentration and whether collections are keeping pace with growth.

Inventory

Inventory protects service levels but absorbs cash and can become obsolete. Segment inventory by velocity, margin and strategic importance instead of managing every item with one rule.

Payables

Supplier terms can finance part of the operating cycle, but extending them aggressively can damage relationships or reduce access to favorable supply.

Manage the system

Forecast cash alongside profit. A useful growth plan states not only how much revenue can be won, but how much working capital that growth is expected to consume.