Your biggest customer wants to increase its order. The margins are good. The team has capacity. On the income statement, this looks like the kind of problem you hoped to have.
Then your supplier asks for payment before your customer has paid you.
The order can be profitable and still leave you short of cash. Revenue tells you what you sold. Margin tells you what is left after a defined set of costs. Neither tells you how much money must sit inside the business while you wait to get paid.
The sale comes with a funding requirement
Consider a distributor growing from $2 million to $3 million in annual sales, with a 30% gross margin. Customers pay in 45 days. Inventory sits for 60 days before sale. Suppliers are paid in 30 days.
At those terms, the extra $1 million in sales ties up approximately:
- $123,000 in receivables: sales made, cash not yet collected.
- $115,000 in inventory: goods purchased but not yet sold.
- Less $58,000 in payables: the portion still financed by suppliers.
The net requirement is about $181,000 of additional operating working capital.
That is not an expense or a loss. It is money committed to supporting the larger business. The extra sales also generate $300,000 of annual gross profit, but gross profit is not free cash: overhead, taxes, equipment and the timing of collections still matter.
This is why “the order pays for itself” is an incomplete answer. It may pay for itself eventually. Someone must fund the interval.
Negotiate the terms, not just the price
Suppose the distributor reaches $3 million in sales but gets collection time down from 45 days to 30. Receivables fall by roughly $123,000 compared with the unchanged-terms growth case. The additional working-capital requirement drops from about $181,000 to $58,000.
That change is worth examining alongside a price negotiation. A deposit, staged billing or faster acceptance of invoices may make a good order easier to finance without changing its headline price.
But faster payment is not free if you buy it with a discount. A 1% discount applied to all $3 million of annual sales costs $30,000 each year. Releasing $123,000 of cash once is not the same as earning $123,000 every year. Compare the recurring discount with the financing cost avoided, collection risk reduced and flexibility gained.
The same discipline applies to inventory and payables. Less stock releases cash but may cause missed sales. Longer supplier terms help until they bring higher prices or a less reliable supplier. The goal is not the lowest possible working capital. It is enough liquidity to support a business that still works.
Use this as a first screen, not a cash forecast
The tool estimates average balances using annual sales and a 365-day year:
Receivables = sales × collection days ÷ 365
Inventory = cost of goods sold × inventory days ÷ 365
Payables ≈ cost of goods sold × payment days ÷ 365
It then compares receivables plus inventory minus payables before and after growth. Inventory and payables use cost, not selling price. The payables approximation assumes purchases broadly track cost of goods sold; a rapid stock build can break that assumption.
These are steady-state estimates. They will not reveal the deepest cash shortfall during a launch, a seasonal inventory buildup or a late payment from a major customer. For that, map actual receipts and payments week by week, including payroll, tax, debt and capital spending.
If you use AI to help build that forecast, separate fixed payment deadlines from estimates of when cash will arrive. Before You Follow an AI Plan, Try to Break It shows a practical way to test those assumptions.
Before accepting a large order, ask three questions: How much does it earn? How much cash does it tie up? When does that cash come back?
A growing business needs answers to all three.
Yosef Gerson also publishes as Yossi Gerson.