Working Capital is not your friend (the cash flow math nobody explains)

TLDR

Growing sales can kill your business faster than declining sales. A craft beverage brand scaled from €2M to €6M in revenue and burned through €900k in the process—not because their product failed, but because nobody calculated how much cash they'd need to fund that growth. This is the working capital trap: the faster you grow, the more cash you need tied up in inventory, production, and waiting for customers to pay. Prepayment terms to suppliers extend how long your cash is locked, making the problem worse. This guide breaks down the cash conversion cycle, shows you how to calculate your working capital requirements, and explains why "grow first, figure out cash later" is a recipe for bankruptcy.

The €147k Problem That Comes With Success

A functional beverage brand hit their revenue target: 50% growth year-over-year. €3M to €4.5M. The team celebrated. The board was pleased. Three months later, they were scrambling for bridge financing.

Here's what happened:

Their cash conversion cycle was 71 days. But they also paid 20% upfront to their co-packer before production even started, which meant their cash started flowing out 30 days earlier than they'd accounted for.

At €3M revenue with 35% COGS (€1.05M annually, €87.5k monthly), they needed roughly €208k in working capital tied up in operations at any given time.

At €4.5M revenue, monthly COGS jumped to €131.25k. Now they needed €312k in working capital.

The growth penalty: €104k in additional cash needed just to fund the same business at a larger scale.

They had grown by €1.5M in revenue. But they needed €104k in cash immediately—cash they didn't have—just to keep operations running while waiting for customers to pay.

This is the part of growth nobody warns you about. Revenue goes up. Congratulations. Now find €104k before next quarter or operations stop.

What Working Capital Actually Is (And Why It Matters More Than Profit)

Working capital is the cash you need to keep your business running between the time you pay for things (inventory, production, suppliers) and the time you get paid.

The formula: Working Capital = Current Assets - Current Liabilities

In practice: Working Capital = (Cash + Inventory + Accounts Receivable) - (Accounts Payable + Short-term Debt)

But that formula hides the real problem. What matters isn't your working capital balance—it's your working capital requirement and how fast it's growing.

The cash conversion cycle measures the time a company must finance the costs of making products or delivering services before receiving payment for them.

Let me show you what this actually looks like with a real product journey.

One Production Run: The Journey of 10,000 Bottles

Let's follow one production batch of functional beverage from order to collection. This is where working capital lives—in the actual, physical journey of your product and the cash that follows it.

Day -30: The Order

You place an order with your co-packer for 10,000 bottles. Production cost: €100k (€10 per bottle COGS). Your co-packer requires 20% upfront. You wire €20k immediately. The product doesn't exist yet. This €20k is now locked—you can't use it for anything else.

Day 0: Production Completes

Your co-packer delivers 10,000 bottles. You pay the remaining €80k (the other 80% of the €100k production cost). The bottles arrive at your warehouse. You now have €100k tied up in inventory sitting on pallets. Your total cash outflow so far: €100k (€20k prepaid + €80k on delivery).

Days 1-45: Inventory Storage (DIO = 45 days)

The 10,000 bottles sit in your warehouse. You're paying warehousing costs, insurance, and handling. During this time, distributors place orders, and you prepare shipments. On average, your inventory sits for 45 days before moving out. This is Days Inventory Outstanding (DIO)—calculated using COGS: (Average Inventory ÷ Annual COGS) × 365.

Your €100k is still locked. No cash has come back yet.

Day 35: Supplier Payment (DPO = 35 days)

Your ingredient suppliers invoiced you when they delivered raw materials to your co-packer. You had net 30 terms, which in practice means you pay around day 35 (accounting for processing). Let's say ingredients were €30k of your €100k COGS. You pay them now. This is Days Payable Outstanding (DPO)—calculated using COGS: (Average Accounts Payable ÷ Annual COGS) × 365.

DPO is the only "relief" in the cycle. It's money you got to hold onto for a little while before paying. It reduces your working capital requirement.

Day 45: Shipment to Distributor

You ship all 10,000 bottles to your distributor. The bottles leave your warehouse. You invoice the distributor for €143k (€14.30 wholesale price × 10,000 bottles). Your distributor has net 60 payment terms.

Your €100k COGS is still locked. You're waiting for payment.

Days 45-106: Distributor Sales Cycle (DSO = 61 days)

The distributor warehouses your bottles, ships them to retailers (Rewe, Edeka, specialty stores), retailers put them on shelves, consumers buy them. Eventually, the distributor processes your invoice and prepares payment. On net 60 terms plus processing delays, you typically wait 61 days from invoice date. This is Days Sales Outstanding (DSO)—calculated using Revenue: (Average Accounts Receivable ÷ Annual Revenue) × 365.

Note: DSO uses revenue because accounts receivable are based on what customers owe you (the selling price), not your cost.

Day 106: Collection

Money finally hits your account: €143k. You've now collected payment. Your revenue on this batch is €143k. Your COGS was €100k. Your gross profit is €43k (43% margin).

But let's look at the cash timeline:

• Day -30: Paid €20k (prepayment)

• Day 0: Paid €80k (balance)

• Day 35: Paid €30k (suppliers)

• Day 106: Received €143k

Total cash locked period: 136 days from first payment to collection.

The Cash Conversion Cycle: The Number That Determines If You Can Afford Growth

The cash conversion cycle (CCC) tells you exactly how many days your cash is locked up in operations.

The formula: CCC = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

Using our beverage example:

• DIO: 45 days (inventory sits before shipping)

• DSO: 61 days (waiting for distributor payment)

• DPO: 35 days (time before you pay suppliers)

Cash Conversion Cycle = 45 + 61 - 35 = 71 days

Here's what this means: From the moment you take delivery of inventory (Day 0) until you collect payment (Day 71 after taking into account when you pay suppliers), 71 days pass. During this time, your cash is locked in the business cycle.

Important note about prepayment: The €20k you paid 30 days early doesn't change your total COGS (still €100k), but it does mean your cash starts flowing out earlier. The prepayment extends the total time your cash is locked (from Day -30 to Day 106 = 136 days total), but your working capital calculation is based on the CCC (71 days) multiplied by your ongoing monthly COGS.

Now here's where it gets painful:

A company with a 30-day cycle can self-fund expansion, while a 120-day cycle might require constant equity dilution or debt financing just to maintain operations.

A 71-day cycle means this brand needs 71 days' worth of COGS sitting in cash or credit lines at all times. Scale revenue by 50%, and you need 50% more cash immediately.

Why Growth Is Expensive (The Math Your CFO Should Have Shown You)

Here's the uncomfortable math:

Current state:

• Revenue: €3M annually

• COGS: €1.05M annually (35%)

• Monthly COGS: €87.5k

• Cash conversion cycle: 71 days

• Working capital tied up: €87.5k × (71 ÷ 30) = €207.9k

After 50% growth:

• Revenue: €4.5M annually

• COGS: €1.575M annually (35%)

• Monthly COGS: €131.25k

• Cash conversion cycle: still 71 days

• Working capital tied up: €131.25k × (71 ÷ 30) = €311.9k

Growth penalty: €104k

This brand needs to find €104k in cash just to keep operating at the new revenue level. That's cash needed before considering:

• Increased marketing spend to drive that growth

• New hires to manage increased volume

• Additional equipment or warehouse space

• Any actual capital investments

In high-growth critical scaling phases, rapid sales growth has the ability to create a 'growth penalty' where even increasing working capital requirements begin to outpace cash generation.

This is why businesses with €2M in revenue and healthy margins can be cash-starved at €6M in revenue. They're not unprofitable. They're just funding their own growth.

The Four Levers You Actually Control

Most businesses can't change their cash conversion cycle overnight. Retailers won't suddenly pay in 30 days instead of 60. But you can influence each component strategically.

Lever 1: Prepayment Terms (Reduce the Timing Impact)

Prepayment doesn't increase your total COGS, but it does mean your cash flows out earlier, extending the total time your money is locked away from your business.

What kills cash flow with prepayments:

• Accepting standard 20-30% deposits without negotiation

• Not leveraging volume for better terms

• Treating prepayments as "normal" instead of negotiable

What fixes it:

• Negotiate better terms as you scale (10% or even 0% prepayment at higher volumes)

• Use trade credit insurance to reduce supplier risk and eliminate prepayments

• Split production across multiple co-packers to create competition for terms

A beverage brand reduced their prepayment from 20% to 10% by committing to larger annual volumes. This didn't change their total COGS, but it meant €10k less cash flowing out 30 days early on every €100k production run. The impact: freed up working capital immediately.

Lever 2: Days Inventory Outstanding (Reduce It)

The longer inventory sits, the longer your cash is tied up.

What kills DIO in Food & Beverage:

• Overproduction to hit volume discounts from co-packers

• Safety stock for "what if" scenarios that never happen

• Slow-moving SKUs that should have been killed months ago

What fixes it:

• Produce more frequently in smaller batches (yes, you'll pay slightly more per unit, but you'll free up massive working capital)

• Kill SKUs with turnover rates >90 days

• Use sales velocity data to right-size production runs

A beverage brand reduced DIO from 60 days to 40 days by moving to biweekly production runs instead of monthly. They paid 8% more per unit on co-packing fees. They freed up €52k in working capital (€87.5k × 20 days ÷ 30 = €58.3k). The payoff period was 6 weeks.

Lever 3: Days Sales Outstanding (Reduce It)

The faster customers pay, the less working capital you need.

What kills DSO in Food & Beverage:

• Distributors paying on net 60+ terms

• Slow invoicing processes

• Weak collections discipline

What fixes it:

• Negotiate payment terms aggressively (especially with new distributor relationships—they expect it)

• Offer 2% discount for payment within 10 days (costs you 2%, saves you 50+ days of financing)

• Invoice immediately upon shipment, not weekly batch processing

• Use invoice factoring for large orders if DSO >60 days

With invoice factoring, businesses sell their outstanding invoices to a factoring company. Instead of waiting 60+ days to be paid by their customers, businesses can convert their unpaid accounts receivable into immediate cash.

One organic snack brand cut DSO from 70 days to 45 days by offering early payment discounts and tightening collections. Cost: 2% margin hit on early payers. Benefit: €72.9k in freed-up working capital (€87.5k × 25 days ÷ 30).

Lever 4: Days Payable Outstanding (Extend It)

The longer you can wait to pay suppliers without damaging relationships, the better your cash position.

What helps DPO in Food & Beverage:

• Negotiating longer terms with co-packers and ingredient suppliers

• Staggering payment schedules across different suppliers

• Using credit strategically (if your cost of credit < your cost of working capital, it makes sense)

What doesn't:

• Slow-paying suppliers to the point of damaging relationships

• Ignoring payment terms and hoping suppliers don't notice

• Using DPO as a Band-Aid for fundamentally broken cash flow

The goal isn't to stretch payables to breaking point. While it is good for the company's own working capital position to delay payment as long as possible, it should consider the impact of delaying payment on its own supply chain.

The Real Cost of a Bad Cash Conversion Cycle

Let's look at what a 90-day CCC vs a 45-day CCC means for the same business:

Scenario A: 90-day CCC

• Monthly COGS: €87.5k

• Working capital requirement: €87.5k × (90 ÷ 30) = €262.5k

• To grow 30% (COGS to €113.75k monthly), need: €341.25k working capital

• Growth cost: €78.75k cash needed immediately

Scenario B: 45-day CCC

• Monthly COGS: €87.5k

• Working capital requirement: €87.5k × (45 ÷ 30) = €131.25k

• To grow 30% (COGS to €113.75k monthly), need: €170.63k working capital

• Growth cost: €39.38k cash needed immediately

Same growth. Half the cash requirement. That's a €39.37k difference—the difference between raising a bridge round and self-funding.

When Working Capital Kills Growth (Real Example)

An organic juice brand scaled from €800k to €3.2M in 18 months. Incredible growth. They celebrated. Then they hit a wall.

Their CCC was 85 days:

• 50 days inventory (cold-pressed juice, fresh ingredients, short shelf life)

• 65 days receivables (health food chains on net 60)

• 30 days payables

CCC: 50 + 65 - 30 = 85 days

Plus they paid 25% upfront to their co-packer, meaning cash started flowing out even earlier.

At €800k annual revenue (40% COGS = €320k):Monthly COGS: €26.7kWorking capital needed: €26.7k × (85 ÷ 30) = €75.7k

At €3.2M annual revenue (40% COGS = €1.28M):Monthly COGS: €106.7kWorking capital needed: €106.7k × (85 ÷ 30) = €302.7k

They needed €227k in additional cash just to operate at the new scale.

They had raised €400k in equity 14 months prior. They'd spent €180k on equipment, €120k on marketing, €80k on team expansion. They had €20k left.

They couldn't make payroll in Month 19 despite being "profitable" on paper.

Their options:

1. Raise emergency bridge financing (expensive, dilutive)

2. Dramatically slow growth to let cash catch up (but momentum would die)

3. Renegotiate terms across the entire supply chain (time they didn't have)

They chose option 1. They raised €350k in bridge financing at a 30% discount to their previous round valuation.

The preventable cost of not understanding working capital: €105k in unnecessary dilution.

How To Calculate Your Working Capital Requirement

Step 1: Gather your numbers

From your balance sheet:

• Average Inventory

• Average Accounts Receivable

• Average Accounts Payable

From your P&L:

• Annual Revenue

• Annual COGS

Step 2: Calculate your cash conversion cycle components

Days Inventory Outstanding = (Average Inventory ÷ Annual COGS) × 365

Days Sales Outstanding = (Average AR ÷ Annual Revenue) × 365

Days Payable Outstanding = (Average AP ÷ Annual COGS) × 365

CCC = DIO + DSO - DPO

Step 3: Calculate your monthly COGS

Monthly COGS = Annual COGS ÷ 12

Step 4: Calculate your working capital requirement

Working Capital Requirement = Monthly COGS × (CCC ÷ 30)

Step 5: Model your growth scenario

New Monthly COGS = Current Monthly COGS × (1 + Growth Rate)

New Working Capital Requirement = New Monthly COGS × (CCC ÷ 30)

Cash Gap = New WC Requirement - Current WC Requirement

Step 6: Identify which lever to pull

• If prepayment terms >20% → negotiate this down (reduces early cash outflow)

• If DIO >60 days → focus on inventory optimization

• If DSO >60 days → focus on collections and payment terms

• If DPO <30 days → negotiate longer terms (carefully)

What Good Looks Like (Industry Benchmarks)

Retailers tend to have best working capital cycle at around nine days, as customers pay with cash at the point of sale, translating into a low level of receivables.

But Food & Beverage brands aren't retailers. Here's what realistic looks like:

Craft Food & Beverage brands:

• Prepayment: 15-25% (negotiate down as you scale, but doesn't change total COGS)

• DIO: 30-45 days (fresh/perishable products limit this)

• DSO: 45-60 days (distributor-driven; hard to change dramatically)

• DPO: 30-40 days (supplier relationships matter)

• Target CCC: 45-65 days

Larger F&B manufacturers with direct retail:

• Prepayment: 0-10% (negotiating power eliminates this)

• DIO: 25-40 days (better forecasting, larger volumes)

• DSO: 30-45 days (direct retail relationships, better terms)

• DPO: 40-50 days (negotiating power with suppliers)

• Target CCC: 15-45 days

If your CCC is >90 days, you have a structural problem. If it's >120 days, growth will be nearly impossible without constant external financing.

The Strategic Question Nobody Asks

"Can we afford this growth?"

Not "is there market demand"—that's table stakes. Not "will we be profitable"—that's insufficient.

The question is: do we have the cash to fund the working capital requirement this growth creates?

If the answer is no, you have three options:

Option 1: Improve your cash cycle first, then grow

Reduce DIO, DSO, or extend DPO before scaling. Negotiate prepayment terms to reduce early cash outflow. Slower growth, but sustainable.

Option 2: Raise capital to fund working capital needs

Equity or debt specifically for working capital. Expensive, but enables faster growth.

Option 3: Grow slower to match your cash generation

Painful if competitors are scaling faster, but better than bankruptcy.

Most businesses choose none of the above. They grow fast, hope cash works itself out, and discover too late that working capital isn't optional.

What To Do Starting Tomorrow

Calculate these numbers:

☐ Your current cash conversion cycle (DIO + DSO - DPO)

☐ Your prepayment terms (understand timing impact, not amount)

☐ Your current working capital requirement (Monthly COGS × CCC/30)

☐ Your growth scenario working capital requirement

☐ The cash gap between current state and growth state

Then decide:

☐ Can you self-fund this gap from operations?

☐ Do you need to optimize your cash cycle before growing?

☐ Do you need external financing?

And model:

☐ What happens if you reduce/eliminate prepayments? (earlier cash stays in business longer)

☐ What happens if you reduce DIO by 15 days?

☐ What happens if you reduce DSO by 10 days?

☐ What happens if you extend DPO by 10 days?

Small changes in cash cycle have massive impacts on working capital needs.

The Bottom Line

Working capital isn't your friend. It's not there to help you grow. It's the tax you pay for operating a business that doesn't collect cash instantly.

The faster you grow, the more working capital you need. The longer your cash cycle, the more expensive growth becomes. Prepayment terms extend how long your cash is locked, making it worse.

You can have strong margins. You can have product-market fit. You can have incredible demand. And you can still run out of cash because nobody calculated the working capital requirement of scaling from €2M to €6M.

Revenue growth is a vanity metric if you can't fund the working capital needed to deliver on that revenue.

Calculate your cash cycle. Understand prepayment timing impacts. Model your working capital needs. Then grow at the pace your cash can support—not the pace your ego wants.

Disclaimer

All data and calculations in this article are simplified for illustration purposes. Actual results depend on each company’s product mix, margins, service levels, and supply chain structure.

---

🛠 Curious how to apply this to your business? We guide you step by step - our services. Book a chat here.

🌐​Fuel your strategy addiction. Follow us on LinkedIn for more content.

---