A Georgetown food distributor wins a sizeable order from a hotel group. The sale looks promising: the customer will pay G$6 million, comfortably more than the distributor expects to spend fulfilling it. Yet the business must purchase stock, arrange transport and pay staff before it can deliver. The hotel will settle its invoice 45 days later.
On paper, the order should make the business more profitable. At the bank, it may create a problem. If stock and delivery require G$4.1 million before the customer pays, but the distributor has only G$1.2 million available, it needs to find G$2.9 million simply to complete a profitable sale. The figures are illustrative, but the timing problem is familiar to growing businesses.
This is why a company can have strong demand and still struggle to pay its bills. Sales, profit and cash are related, but they do not arrive at the same moment. Understanding working capital means understanding what happens between paying for the work and collecting from the customer.
The money tied up between purchase and payment
Working capital is often described as current assets minus current liabilities. Current assets include cash, inventory and amounts customers owe the business. Current liabilities include obligations due in the near term, such as supplier bills. That accounting measure is useful, but it is not the whole story. A balance sheet can show substantial inventory and receivables while the business has too little cash to meet this Friday’s payroll.
The composition matters as much as the total. Cash is available now; an invoice becomes cash only when collected; slow-moving stock may not sell for its recorded value. Payroll and a firm supplier due date cannot be postponed because the balance sheet shows positive working capital. The IFC’s account of the working-capital cycle distinguishes this balance-sheet measure from the days cash remains committed to operations.
For the distributor, the sequence begins when it orders stock. It may pay an overseas supplier before the goods reach Guyana, or it may receive a short period of supplier credit. Once the stock arrives, the business pays for handling, storage, delivery and staff. Only after delivery does it issue an invoice to the hotel. A payment term of 45 days means the cash may arrive weeks after most of those costs have been incurred.
That interval is the working-capital cycle in practice. Its length depends on how long goods sit in stock, how quickly customers pay and when the business must settle its own suppliers. An investor looking only at annual revenue can miss a shortage that occurs in a particular week.
Why more sales can mean less cash
Suppose the first hotel order succeeds and the distributor wins three more. Each new contract promises a margin, but each also requires stock and delivery spending before payment. The business may have to fund the second order while the first invoice remains unpaid, then fund a third while two invoices are still outstanding. Growth increases the amount of cash tied up in the cycle.
This is not necessarily evidence that the sales are bad. It is a question of whether the company can finance the timing gap at a cost that still leaves the orders worthwhile. A contract may be profitable after all direct costs yet impossible to deliver if the company cannot pay suppliers on time. Conversely, a company may have access to financing but find that interest, fees and late-payment risk consume too much of its expected margin.
Long customer payment terms are one reason the gap widens. A customer may request 30 or 45 days after invoicing, but the practical clock may start even later if an invoice cannot be submitted until delivery is accepted or supporting documents are approved. The difference between an agreed term and the day cash actually reaches the bank matters. A future Invest Guyana Explains article will examine credit terms in more detail.
What the numbers do—and do not—tell you
Profit measures whether revenue exceeds costs over a period under the relevant accounting rules. Cash flow records when money enters and leaves the business. Neither measure replaces the other. A company can report profit while waiting to collect invoices, just as it can temporarily show a healthy bank balance after receiving a loan that it must later repay.
Three operating measures help explain the gap. Inventory days indicate how long goods remain unsold. Receivable days indicate how long customers take to pay. Payable days indicate the time a business takes to pay suppliers. If stock remains in the warehouse longer or customers pay later, more cash is generally tied up. If suppliers allow longer terms, the business may have more time to collect—but only if those arrangements are dependable and commercially fair.
Together, these measures form the cash-conversion cycle: inventory days plus receivable days, less payable days. BDC explains the measure. Suppose the distributor holds stock for 25 days, collects 45 days after a sale and pays its supplier 20 days after purchase. Its illustrative cycle is 50 days: 25 + 45 − 20. Cash spent on that stock may be unavailable for roughly seven weeks. Yet an average is not a payment calendar; one large invoice falling due on Tuesday can create a shortfall.
The measures have trade-offs. Extra stock may protect against an unreliable lead time, but it uses cash and risks spoilage. Longer supplier terms may release cash, but could raise prices or threaten the next shipment. Faster collection depends on the sales terms and invoicing process. The aim is to make these trade-offs explicit before promising a delivery date.
The distributor should therefore ask a more useful question than “How many orders did we win?” It needs to know how much cash each order will require, when that cash must be spent and when collection is realistically expected. A large receivable is not a substitute for money available to pay wages tomorrow.
Managing the gap before it becomes a crisis
There is no single remedy for every business. The distributor might negotiate a deposit or milestone payments, invoice as soon as the contract allows, or agree on clear acceptance documents so that a preventable paperwork dispute does not delay collection. It might reduce stock held ahead of confirmed demand or negotiate supplier terms that better match its customer cycle. It should also follow overdue invoices promptly rather than treating collection as an administrative afterthought.
Financing can help when a sound order creates a temporary gap. A working-capital facility, an overdraft or a receivables-finance arrangement may bring cash forward, subject to eligibility, pricing and risk. The International Finance Corporation’s supply-chain finance programme illustrates how eligible receivables can be converted into earlier cash for suppliers. None of these products turns a weak contract into a strong one: the cost and conditions must be compared with the margin and the consequences of late payment.
The facility size should follow the peak gap, not the order value. The illustrative G$2.9 million is the difference between G$4.1 million of pre-payment spending and G$1.2 million available. Another order or late hotel payment could deepen it; a deposit or supplier credit could reduce it. A lender will ask which receipts repay the borrowing and what happens if they slip. Borrowing repeatedly to cover a permanent loss is different from financing a bounded collection cycle.
The most immediate management tool is often a short, regularly updated cash forecast. It puts expected receipts and payments into the weeks when they are likely to occur, rather than the month in which a sale is recorded. Our Guide to Building a 13-Week Cash-Flow Forecast shows how to build one and use an early warning of a shortfall.
The investor’s question
For an investor or lender, working capital is not a minor accounting detail. It helps reveal whether projected growth can actually be delivered. A proposal for higher sales should be accompanied by a credible plan for inventory, customer payment, supplier terms and the cash required between them. The IFC’s guidance for growing small and medium-sized enterprises recommends using cash-flow forecasts to identify financing needs and inform investment decisions.
The investor should test the forecast against actual collection and stock records. If management assumes new hotels pay in 30 days while existing ones pay in 55, the funding request is understated. If one buyer dominates receivables, a dispute may have an outsized effect. Comparing forecast with actual cash movements and separating confirmed orders from hoped-for sales reveals whether growth creates a financeable timing gap or exposes a misunderstood business model.
Return to the Georgetown distributor. Winning the hotel contract was good news, but the order alone did not put G$6 million in the bank. The business must bridge the period in which it pays G$4.1 million and waits to collect. If it can do so on sensible terms, growth may create value. If it cannot, taking more orders may intensify the shortage.
That is the essential working-capital lesson: a business must finance not only what it builds or sells, but also the time between spending and being paid.
