Working capital model

Growth consumes cash. A company that doubles its orders has to buy stock twice as fast, and the money arrives later than the goods leave.

The components

For most online shops stock is the largest item and payables the most negotiable. Receivables barely exist in consumer businesses paid at checkout, which is one reason e-commerce scales more easily than wholesale.

The growth trap

A business with thirty percent growth and a ninety day stock cycle needs cash before it earns it. Every profitable month increases the amount tied up, and the bank balance falls while the profit and loss account improves.

Levers

• Stock turns: fewer slow lines, tighter ordering, shorter lead times
• Supplier terms: the largest single lever in most shops
• Pre-orders and made-to-order lines, which invert the cycle entirely
• Consignment arrangements where a supplier is willing

In a transaction

Working capital is also a negotiating item when a business changes hands. A normal level is agreed and the amount paid is adjusted for the difference at completion, which is why the model matters beyond day to day management.