Start with the operating cycle
Working capital is driven by receivables, inventory and work in progress, less supplier credit. Timing and uncertainty must be added for decision-making.
Why growth increases the requirement
When work and materials are funded before customers pay, every new order needs financing first. A healthy order book can therefore create liquidity pressure.
Model three scenarios
- A base case based on the current plan.
- A pressure case with slower receipts and higher costs.
- An acceleration case requiring capacity earlier.
Estimate the lowest cash position in each case and add an appropriate buffer. Then improve the cycle through prompt invoicing, deposits, milestone billing and active receivables management.
Three levers to shorten the cycle
Three levers usually offer the fastest improvement: tightening payment terms and following up on overdue invoices sooner, negotiating longer payment terms with suppliers where the relationship allows it, and reducing excess inventory that has built up without a clear turnover target. Small, consistent improvements across all three often free up more cash than chasing a single large renegotiation.
Managing working capital as a growth variable
Many growing businesses treat working capital as a technical figure explained after the fact, when it is actually one of the most important variables to steer growth by. Every extra euro of revenue often first requires extra inventory, extra work in progress and a longer wait before customers pay — well before that euro actually arrives as cash. Businesses that skip this calculation discover the cash requirement only once it is already being felt in the bank account.
Frequently asked: how much working capital is normal?
This varies strongly by sector and business model. A service business invoicing monthly with little inventory typically needs far less working capital than a wholesaler or manufacturer with longer lead times and physical stock. Rather than comparing to a sector average, it is more useful to track your own cash conversion cycle over time: if it keeps rising as the business grows, that is a signal to adjust financing, payment terms or processes in time.
Model growth before accepting the order
When a larger contract appears, owners naturally look at revenue and margin. Add the cash timing. When will staff, materials and taxes be paid, and when will the customer payment actually arrive? A profitable contract can require months of funding before cash becomes available.
For each growth scenario, estimate additional receivables, inventory and work in progress. Compare these with supplier credit, available cash and credit facilities. This shows whether growth funds itself or requires extra headroom first.
Address the operational causes
Working capital is not purely a finance issue. Late invoicing may begin with project approval. Excess inventory can arise from unclear reorder points. Slow payment may be linked to invoice errors. Discuss the process creating the balance, not only the balance itself.
Working capital and exit readiness
Consistent control of receivables, inventory and work in progress makes cash flow more predictable. This supports growth and also helps create a sale-ready business with a business value supported by reliable figures.
Founder of Impact Growth Partner, combining finance, M&A and private-equity experience with practical financial and strategic guidance for SMEs.
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