The money trapped between doing the work and being paid for it. It is why profitable, growing companies run out of money — and it is the cheapest financing you are not using.
12 min read · Level 3
Growth is not free, and working capital is the bill. Every new customer widens the gap between the work you have done and the money you have received, which means success itself consumes cash — the faster you grow, the more it consumes. This is the most counter-intuitive fact in company finance and the one that kills the most healthy businesses. Nobody expects to die of winning.
Working capital is the money tied up in day-to-day operations: what customers owe you, minus what you owe suppliers.
DSO — days sales outstanding — is the average gap between invoicing and getting paid.
The cash cost of growth is roughly: monthly revenue increase × (DSO ÷ 30).
Because it explains the single most confusing pattern in early-stage finance: revenue up, profit positive, bank balance falling. Nothing is wrong with the business. The money is real; it is just sitting in somebody else's accounts payable.
And because it is the cheapest financing available. Cutting DSO from 60 days to 30 pulls a month of revenue forward permanently — no dilution, no interest, no lender, no investor.
A B2B company growing 15% a month, invoicing on 60-day terms.
Revenue Cash collected Receivables Month 1 £30,000 £20,000 £40,000 Month 2 £34,500 £23,000 £51,500 Month 3 £39,675 £26,450 £64,725
Revenue grew £9,675 across the quarter. Receivables grew £24,725 — that is cash the company earned and does not have.
Meanwhile costs are paid now, in full, every month.
So this company can be profitable on every single sale and still run out of money, purely because it is growing. Slowing growth would improve its cash position, which is a genuinely strange sentence and completely true.
What actually fixes it, in order of cost:
⚠ Most founders reach for 6 without trying 1 through 4.
First-time founders read a rising receivables balance as growth and feel good about it. It is a growing pile of money you do not have, and past 60 days a meaningful share of it never arrives at all.
The second mistake: accepting the customer's standard payment terms without discussion. Large companies propose 60 or 90 days as a default, and it is frequently negotiable — particularly for a small supplier who simply asks.
The third: raising equity to fund a timing gap. Selling a permanent share of your company to solve a problem that shortened terms or a deposit would have fixed is the most expensive mistake on this list.
(Receivables ÷ revenue) × 30. If it is above 45, this is costing you real money every month you grow.
Monthly revenue increase × (DSO ÷ 30). That is roughly the extra cash each month of growth consumes.
30 days rather than 60. Ask before signing, when you have leverage, not after.
Sounds trivial, routinely gains a week or more, and is entirely within your control.
10–15% is expensive as a discount and cheap as financing, and it validates the product at the same time.
During the close, while the list is on screen. Overdue receivables age badly and quickly.
The moment you send your first invoice, and monthly from then on.
If you are paid by card at the point of sale, working capital is barely a concern and this can wait. It becomes urgent the day you move upmarket to invoiced customers.
Supermarkets and large retailers typically collect from customers immediately and pay suppliers on extended terms. That produces negative working capital: growth generates cash rather than consuming it. Amazon's early scale is frequently analysed in these terms — collecting at the point of sale while paying suppliers later meant expansion funded itself.
Look at when you collect versus when you pay. Moving either one is often worth more than the equivalent effort spent on price, and it costs nothing in dilution.
A common early-stage sequence: a B2B company grows well, runs short of cash, and raises a bridge round. Examined afterwards, the shortfall matched almost exactly the money sitting in 60- and 90-day receivables. Shortening terms and asking for deposits would have covered the gap without selling any of the company.
Before raising to cover a cash gap, work out whether it is a profitability problem or a timing one. They look identical in the bank account and have completely different solutions.
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