Working capital: why growing faster makes you poorer
There is a particular kind of failure that only happens to businesses that are winning. Sales are up 40%, every month is a record, the P&L looks excellent — and the bank balance keeps falling.
Nothing is wrong. Growth consumes cash, mechanically, before it produces any. The faster you grow, the more it consumes, and there is a rate above which no amount of profitability keeps up.
Where the money goes
To sell more you first buy more inventory. You deliver, and the sale becomes a receivable rather than cash. Suppliers give you some breathing room, but usually less than customers take from you.
The net of those three is your working capital requirement, and it scales with revenue. Grow revenue by $500,000 and you need to fund whatever proportion of it sits in that cycle at any moment.
| Last year | This year | Change | |
|---|---|---|---|
| Revenue | $1,250,000 | $1,750,000 | +40% |
| Net income | $96,000 | $154,000 | +$58,000 |
| Receivables | $154,000 | $226,000 | −$72,000 cash |
| Inventory | $188,000 | $268,000 | −$80,000 cash |
| Payables | $112,000 | $136,000 | +$24,000 cash |
| Working capital absorbed | $128,000 | ||
| Net cash change | −$70,000 | on a record year |
Your self-fundable growth rate
There is a growth rate above which you must raise money or slow down, and it is calculable. Roughly: the profit you retain, divided by the working capital each additional dollar of revenue requires.
If every dollar of new revenue ties up 26 cents and you retain 9 cents of profit per dollar, you can self-fund about 35% growth. Grow at 60% and the gap has to come from somewhere — a facility, an injection, or the cash you had at the start, which runs out.
Cash tied per $1
26c
receivables + inventory − payables
Retained per $1
9c
profit kept in the business
Self-fundable growth
35%
above this you need funding
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Shorten the cycle before you slow the growth
The cash requirement is not fixed — it is the length of your operating cycle. Every day you remove from it releases cash permanently and raises the growth rate you can sustain without borrowing.
- Collect faster. Pulling DSO from 47 days to 38 on $1.75m of revenue releases about $43,000 — and keeps releasing it as you grow.
- Take deposits. The most direct fix available: the customer funds the work instead of you.
- Turn inventory faster. Slow stock is the largest single component for most product businesses, and usually the most improvable.
- Extend supplier terms. Free, and the one lever most businesses never even ask about.
Arrange the facility while the numbers are good
If you genuinely intend to grow faster than you can fund, that is a legitimate strategic choice — but it is a financing decision and it should be made deliberately, in advance.
A growing, profitable business is exactly what a lender wants to see, and a line of credit arranged during that stretch is cheap and easy. The same business six months later, having burned its cash on growth, presents far worse: falling balances, tightening ratios, and a rush.
Forecast it. Take next year's revenue plan, apply your working capital percentage to the increase, and you have the funding requirement — long before it becomes urgent.
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