Working Capital During Growth Phases: What Finance Teams Should Monitor

Revenue is growing, the pipeline is full, and all indicators point to growth—and yet, an analysis of liquidity paints a strained picture.

In most cases, the underlying issue is not a revenue problem but a working capital problem: Growth ties up cash in accounts receivable, inventory, and prepaid expenses. Only then does the increase in revenue become apparent. Companies that do not actively manage their working capital during growth phases are, without realizing it, financing their own growth with their own liquidity. This can quickly lead to financial difficulties.

Why Working Capital Becomes a Risk During Phases of Growth

In the early stages, working capital is rarely an issue—thanks to fewer transactions, short payment terms with a small number of suppliers, and a manageable business scope. During the scaling phase, this changes fundamentally: More customers mean more accounts receivable; higher order volumes mean more capital tied up in advance payments or inventory; and more suppliers mean more payment obligations at the same time.

If revenue grows faster than working capital management can keep up, a gap emerges that only becomes apparent in the cash position—usually too late to respond calmly. Without active cash flow management and forward-looking liquidity planning, this gap remains hidden for a long time, until the account balance makes it impossible to ignore.

What Working Capital Actually Measures

Working capital (net working capital) describes the difference between current assets and current liabilities. Put simply, it is the capital tied up in day-to-day business operations before it becomes available as cash.

Positive working capital means that there are more current assets than current liabilities. Negative working capital is not necessarily a bad thing—some business models, such as those that require payment in advance, are deliberately based on this principle. The key factor is whether this trend is being actively managed or is changing in an uncontrolled manner.

The Three Key Factors: Accounts Receivable, Accounts Payable, and Inventory

• Accounts Receivable Management (Days Sales Outstanding): How quickly are invoices actually paid? Every additional day of credit terms ties up cash that is needed for operations.
• Accounts Payable Management (Days Payable Outstanding): How long can payment terms with suppliers be reasonably extended without jeopardizing relationships or terms?
• Inventory / Work in Progress (Days Inventory Outstanding): How much capital is tied up in merchandise, intermediate goods, or work in progress before they are converted into revenue?

Together, these three factors make up the cash conversion cycle—the amount of time it takes for invested capital to be converted back into cash. The shorter this cycle, the less growth you’ll need to pre-finance using your own cash.

The Working Capital Effect: Why Growth Eats Up Cash

An often underestimated effect: Growth almost automatically worsens working capital if no one actively manages the process. More new customers mean more accounts receivable at any given time. A higher order volume means that more advance payments must be financed simultaneously.

When a company scales rapidly, the amount of cash tied up often grows faster than the visible increase in revenue—an effect that remains invisible on the income statement but has a severe impact on cash flow.

Key Metrics in Working Capital Management

• Days Sales Outstanding (DSO)
• Days Payable Outstanding (DPO)
• Days Inventory Outstanding (DIO)
• Cash Conversion Cycle (CCC = DSO + DIO − DPO)
• Working Capital Ratio (Current Assets ÷ Current Liabilities)

These metrics are effective only if they are collected regularly—not just at the time of the annual financial statements—and compared over time. They are most effective when they are an integral part of KPI reporting to management and investors, rather than as ad hoc analyses requested on an as-needed basis.

Establishing Working Capital Management as an Ongoing Routine

• Weekly: Keep track of accounts receivable (AR) and accounts payable (AP); consistently manage the dunning process
• Monthly: Calculate DSO, DPO, and DIO and compare them with the previous month's data; investigate any discrepancies immediately
• Quarterly: Evaluate trends in the cash conversion cycle; review payment terms with customers and suppliers
• During every major growth phase: explicitly factor working capital requirements into budgeting, forecasting, and scenario planning

Any company that fails to integrate working capital into its regular finance operating cycle will be caught off guard every time growth picks up again. This is exactly where effective business partnering comes into play: Finance assesses the cash impact of a growth decision before it is made, not just during the next monthly closing.

When It Makes Sense to Seek External Support for Working Capital Management

These significant warning signs indicate that it’s time to take a closer look: Cash flow is tightening despite rising revenue. Customer payment terms are spiraling out of control. No one on the team can immediately state the current cash conversion cycle. Or: A funding round is coming up, and working capital has not yet been explicitly included in forecasts and investor reporting.

In these cases, a targeted finance operations setup helps to structure working capital management properly from the ground up. Often, a full-time CFO isn’t necessary for this; instead, a fractional CFO or interim CFO can be brought in to establish the structure on a temporary basis. If the structure is already in place but capacity is lacking, ongoing finance operations support—provided as “Finance-as-a-Service” —helps maintain stability in day-to-day operations. When financial due diligence is on the horizon, working capital regularly emerges as one of the areas where investors scrutinize the most closely.

Conclusion: Working capital is the silent cash drain during growth

Working capital rarely becomes a problem because of a single mistake, but rather because no one is keeping a close eye on it as the company grows. Those who actively manage accounts receivable, accounts payable, and inventory—rather than analyzing them only at the end of the year—gain exactly the cash buffer that matters most during periods of growth.

Want to know how much cash is currently tied up unnecessarily in your working capital? In a no-obligation consultation with torq.partners— a financial consulting firm for growing companies—we’ll review your numbers together and identify where the greatest opportunities for improvement lie.