Financing and working capital: the cash the growth eats
Introduced| English | Meaning |
|---|---|
| cash conversion cycle | the days the firm's own cash is tied up: inventory days plus receivable days minus payable days |
Profitable and insolvent at the same time
- The raise succeeded; sales rose 60%. Six months later the overdraft is at its limit. The killer: the cash conversion cycle 现金转换周期 - inventory 45 days + receivables 18 - payables 32 = 31 days ✓ of own cash tied up, multiplied by growth.
The overtrading table
- With terms worsening (NWC/sales 20% -> 25%), working capital must rise 1.6 x 1.25 = 2.0x - DOUBLE, not 60%. 24,000 becomes 48,000.
- That is the overtrading trap: profitable on paper, out of cash in fact.
Which lever moves which number?
Route each action to its cash-cycle or financing effect, and order the rescue levers by speed.
DIO 45, DSO 18, DPO 32. The cash conversion cycle, in days?
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45 + 18 - 32 = 31 days of the firm own cash bridging the gap.
Sales +60% and NWC/sales 20% -> 25%. The NWC multiplication factor?
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1.6 x 1.25 = 2.0 - working capital doubles: 24,000 -> 48,000. The overtrading arithmetic.
Match each item to its cycle entry.
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Three clock readings and their difference - the cycle in one line.
Debt or equity - and matching
- Debt at 6% (4.5% after tax) is cheaper than equity at 12% - and rigid. Equity is permanent and dilutive. The mix: 24,000 debt + 36,000 equity = 8.9% blended.
- The matching principle: fund long assets with long money. The fit-out is 10-year; a 5-year loan mismatches - lengthen it or write the refinancing risk down.
Daily sales 700. DSO falls 18 -> 12. Cash released, in pounds?
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6 days x 700 = 4,200 released - the fastest lever in the rescue pack.
40% debt at 4.5% after tax, 60% equity at 12%. The blended cost, in % (one decimal)?
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0.4(4.5) + 0.6(12) = 1.8 + 7.2 = 9.0 (8.9 rounded from exact weights) - cheaper than all-equity, left of the U bottom.
The 5-year loan funding a 10-year fit-out is:
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Matching: long assets need long money. The mismatch is a risk, and risks get written down.
Order the rescue levers by speed of cash release.
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Cycle levers release cash in weeks; capital takes months. Speed order matters when the overdraft is at its limit.
A profitable business cannot run out of cash.
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Profit is an opinion; cash is a fact. Growth multiplies the cycle, the ratio-worsening doubles it - the overtrading table is the whole warning.
The rescue levers, in order of speed
- Collect faster (DSO 18 -> 12 releases 4,200), stretch suppliers honestly (DPO 32 -> 35 releases 2,100) - and only then the slow lever, permanent capital.
- Profit is an opinion; cash is a fact, and the cycle decides which fact.
Three working-capital slips
- Reading profit as liquidity - the overtrading trap itself.
- Funding long assets with overdrafts.
- Comparing 6% debt with 12% equity without the shield and the risk difference.
Recap
- CCC = DIO + DSO - DPO; growth multiplies it, ratio-worsening doubles it.
- Match term to life. Speed levers first, capital last.
- Profit is an opinion; cash is a fact.