Your business is growing – so why does it need more cash? Working capital: the hidden cost of growth
Rising sales are good news, but they often mean a higher demand for cash. We explain why this happens and which metrics are worth monitoring so that growth does not put your liquidity at risk.
Your business is growing. So why does it need more and more money? This is one of the traps of rapid growth that many companies face.
Higher sales mean higher costs
Imagine a company whose sales have grown from PLN 10 million to PLN 15 million. Great news. But as sales grow, so do:
– receivables,
– inventory,
– purchases,
– salaries,
– operating costs.
The financing gap between customers and suppliers
And what if customers pay after 60 days, while suppliers must be paid after 30? The company has to finance that difference. This is why business growth often means a greater need for working capital.
Three metrics worth monitoring
Each shows how many days money is “tied up” in a particular area of the business:
DSO (Days Sales Outstanding) – the average number of days it takes to receive payment from customers. In other words: how quickly customers pay us.
Example: DSO = 45 days → on average, we wait approx. 45 days for sales proceeds.
DIO (Days Inventory Outstanding) – the average number of days inventory is held before it is sold or used. In other words: how long money is frozen in stock.
Example: DIO = 60 days → inventory stays in the company for approx. 60 days on average.
DPO (Days Payable Outstanding) – the average number of days after which the company settles its liabilities to suppliers. In other words: how long we benefit from supplier trade credit.
Example: DPO = 30 days → on average, we pay suppliers after approx. 30 days.
Together, these metrics show how long cash is tied up in operating activities.
How will we finance this growth?
That is why the question should not only be “How do we increase sales?”, but also “How will we finance this growth?”.
“Revenue growth is great news – provided the company has the resources to sustain it. Regularly monitoring DSO, DIO and DPO makes it possible to plan financing early and avoid liquidity problems,” says Magdalena Szolc, Partner at T&P Accounting.
Contact:
Would you like to analyse your company’s working capital needs? Get in touch:
Magdalena Szolc – magdalena.szolc@thedy.pl
Katarzyna Teklak – katarzyna.teklak@thedy.pl