Working Capital: Why Profitable Growth Can Leave You Short of Cash
Working capital can explain a frustrating business problem: sales are up, the work is profitable, and payroll still feels uncomfortably close.
Your team has delivered. The customer owes you money. But wages and contractor bills have already left the bank, while the customer’s payment is weeks away.
Growth can widen that gap. Before taking on more work, you need to know how much cash the business must put in — and how long it has to wait to get it back.
What is working capital?
Working capital compares current assets and current liabilities to help assess short-term financial health. In practical terms, can your business fund daily operations while it waits for customer payments?
The standard working capital formula is:
Working capital = current assets − current liabilities
Current assets include cash, cash equivalents, accounts receivable, and inventory. Cash equivalents are short-term investments that can quickly become a known amount of cash, with little risk of a change in value.
Current liabilities include supplier bills (accounts payable), accrued expenses, short-term debt, and the current portion of long-term debt: the principal due within a year. BDC’s working capital guide explains this balance-sheet calculation and why it matters during growth.
Suppose a business has $500,000 in current assets and $350,000 in current liabilities. Its net working capital is $150,000.
That doesn’t mean it has $150,000 available to spend today. Cash and cash equivalents are liquid assets, available now or easily converted to cash. Customer invoices and inventory may take longer to become spendable money. Some liabilities may fall due before that happens.
The balance-sheet figure gives you a starting point. A cash flow forecast tells you whether the money will arrive in time.
Check the current ratio, then the timing
The working capital ratio, also called the current ratio, divides current assets by current liabilities. In this example, $500,000 divided by $350,000 is about 1.43. That’s a different calculation from net working capital.
Positive working capital means current assets exceed current liabilities. Negative working capital means the reverse. Those labels need context: a business that collects advance payments has a different cash cycle from one that invoices after delivery.
The practical question is whether available cash and reliable collections can cover obligations as they fall due.
Cash flow vs profit: why the timing matters
Profit measures revenue against expenses. Cash flow tracks money entering and leaving the business.
Under accrual accounting, revenue and expenses follow accounting recognition rules. The dates won’t always match the bank transactions.
Read the financial statements together
The income statement shows revenue, expenses, and net income, or net profit, for a period. The balance sheet shows what the business owns and owes at a particular date.
The cash flow statement explains changes in cash and cash equivalents over the period. Its three sections answer different questions:
- Operating cash flow: What cash did daily business activities generate or use, including customer collections, wages, and supplier payments?
- Investing cash flow: What cash went into or came from investments, such as buying or selling equipment?
- Financing cash flow: What cash came from funding sources or went back to them, such as borrowing or repaying loan principal?
The SEC’s financial statements guide explains how these reports connect.
Positive cash flow means more cash came in than went out over the period; negative cash flow means the reverse. Neither tells you the cause by itself. Borrowing can increase cash without improving profitability. Buying equipment can reduce cash even when customer work is profitable.
Follow the customer payment timeline
Imagine an implementation project that starts in January. You pay a specialist, assign employees, and finish the work in February. The contract allows invoicing after customer acceptance, followed by 30-day payment terms.
Your business funds the work before it gets paid, even when the customer pays on time. If acceptance takes another two weeks, invoicing and collection move back too.
This is why an overdue-invoice report doesn’t show the whole problem. Money can be tied up in completed work that hasn’t even reached the billing stage.
Follow one real project through these dates:
- First cash spent on delivery.
- Work completed.
- Customer acceptance received.
- Invoice sent and accepted.
- Payment collected.
The longest avoidable delay is often where the most useful fix sits.
How much cash does growth require?
Consider a hypothetical service business with steady cash delivery costs of $60,000 a week. Assume it needs to fund five weeks of those costs before the matching customer collections arrive.
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A simple estimate of that delivery-cost funding gap is:
$60,000 × 5 weeks = $300,000
Now suppose new projects increase weekly delivery costs by 25%, to $75,000. Collection timing stays the same.
$75,000 × 5 weeks = $375,000
The business needs another $75,000 to support the larger workload. More profitable work can still require more cash upfront.
These calculations illustrate one part of the funding need. They aren’t a formal working capital balance or a complete cash forecast. Overhead, taxes, debt payments, deposits, supplier terms, and payment variability also affect the amount required.
Use actual payment dates when building the forecast. A useful estimate should show the lowest expected bank balance, not just a monthly average that hides a difficult payroll week.
Four ways to improve working capital management
1. Make the work billable sooner
Start with the agreement.
Could a long project use milestone billing? Would a deposit reasonably reflect the resources you must commit? Can a recurring service be billed at the start of the service period?
Also check acceptance requirements. “Payment after approval” becomes difficult when nobody has defined who approves the work or how long the review should take.
Agree on appropriate terms before signing new work. For existing customers, discuss changes through the contract’s review or renewal process.
The aim is to bring payment timing closer to the cost of delivery.
2. Remove the reasons invoices get stuck
A missing purchase-order number can delay a perfectly valid invoice. So can an incorrect billing entity, an absent completion certificate, or a customer contact who can’t authorize payment.
Collect those details during onboarding. Confirm where invoices go and what the customer needs to process them.
Keep two separate lists: work that’s complete but awaiting approval, and approved work waiting to be invoiced. The first may need a project manager; the second may need billing.
Give each blocked item an owner and a next action. “Resolve the missing purchase order by Thursday” is much more useful than “improve receivables.”
3. Follow collections and customer concentration
Review accounts receivable by due date, customer, and reason for delay.
A disputed invoice needs a different response from an invoice the customer never received. Resolve the cause and agree on a specific payment date.
Pay particular attention to large accounts. One customer’s late payment can matter more than a small improvement across dozens of other invoices.
Test what happens if your biggest expected receipt arrives two weeks late. If that threatens payroll, address the exposure before adding more delivery commitments for the same customer.
4. Match spending to the cash cycle
Look at when you commit to contractors, software capacity, and additional staff.
Can project starts be staggered? Can suppliers offer terms that better match your collection cycle? Can you avoid paying for capacity well before you need it?
Discuss terms openly and pay according to the agreement. Simply delaying suppliers can damage relationships and make future delivery harder.
Also check margin. Faster collections help cash timing, but they won’t make an underpriced service profitable. If delivery takes too many hours for the fee, review scope, price, and rework alongside payment terms.
When does financing make sense?
A line of credit or other financing may help cover a defined, temporary gap between delivery spending and collections.
Before borrowing, identify how much you need, what creates the gap, when collections should repay it, and what happens if those collections arrive late. Add interest, fees, and repayments to the cash forecast.
Check the facility’s conditions too. Available funding may depend on eligible invoices, lending limits, or other requirements.
Borrowing is easier to assess when the operating cycle is understood. If cash keeps disappearing after customer payments arrive, investigate the recurring shortfall before increasing debt.
Keep the weekly review simple
Bring together expected collections, overdue and unbilled work, upcoming delivery costs, and the lowest projected cash balance. Choose a target for cash reserves that allows for normal payment delays and unexpected costs.
Then make one practical decision: clear a billing obstacle, negotiate a milestone, stagger a project start, or arrange funding for a specific gap.
Working capital management becomes useful when it changes what the business does next week. Start with one customer engagement, follow the money, and fix the delay that puts the most pressure on cash.
For a related discussion of the economics behind growth, watch Arron Bennett’s video.
Recommended video: How to Calculate CAC and LTV (Plus Your Real Profit Margin)
Further reading: The SBA’s cash-flow projection workshop listing.
Find the constraint worth investigating first. Book Bennett Financials’ free 20-minute Profit & Tax Leak Check. For US service businesses with $2M–$20M revenue.
