Where cash is tied up in your business: releasing working capital
Your account may run short of cash even when sales grow and profit is positive. Often the issue is not weak revenue, but money tied up in inventory, receivables, supplier advances or payment terms that are too short.
Before taking out a new loan, calculate operating working capital: receivables + inventory + supplier advances − trade payables. Then identify the excess rather than targeting the entire balance. Sometimes improving turnover by a few days releases more cash than another short-term loan.
Quick check: four figures to collect
Use figures at the same date and add average revenue and purchases for the last 3–6 months. Four categories are enough for an initial assessment.
How much customers owe you
Age the debt: not yet due, 1–30 days, 31–60 days and more than 60 days overdue.
How much cash is held in stock
Separate fast-moving products from slow-moving, seasonal, excess and effectively unsaleable stock.
What suppliers have already been paid
Check when goods or work will be delivered and whether prepayments can be reduced.
How much time suppliers allow
Separate normal contractual credit from overdue debt, taxes and obligations that cannot be deferred.
High working capital is not itself a problem. A growing company does need stock and customer credit. The key question is: how much is needed to support sales, and how much stays in the cycle longer than necessary.
Four common places where cash gets tied up
| Area | Checks | First action |
|---|---|---|
| Receivables | Overdue debt, reliance on one buyer and actual payment time | Customer credit limits, reminders before due dates, staged payments and factoring |
| Goods and materials | Turnover by product, minimum order quantities and safety stock | ABC/XYZ analysis, fewer purchases of slow-moving items and clearance of obsolete stock |
| Supplier advances | Prepayment share, delivery delays and unsettled advances | Stage payments, link them to shipment and recover old advances |
| Payment terms | Customers pay later than the business pays suppliers | Align dates and negotiate supplier credit or a delivery schedule |
A dangerous mistake is treating all receivables and inventory as normal simply because they are needed for operations. The aim is a level that supports sales without unnecessarily tying up cash, rather than the highest possible balances.
Example: releasing around RUB 5 million without revenue growth
A trading company has average monthly revenue of RUB 12 million and purchases of RUB 7.5 million. Receivables total RUB 6.4 million and inventory RUB 8.2 million. The business regularly borrows to fund its next purchase.
| Change | Calculation | Potential effect |
|---|---|---|
| Customers pay 7 days sooner | RUB 12 million ÷ 30 × 7 | RUB 2.8 million |
| Inventory falls by 12% without shortages of fast-moving products | RUB 8.2 million × 12% | RUB 984,000 |
| Suppliers allow an additional 5 days of credit | RUB 7.5 million ÷ 30 × 5 | RUB 1.25 million |
| Combined estimate | 2.8 + 0.984 + 1.25 | RUB 5.034 million |
This is not a promised result. Check the effect against contracts, margins, seasonality and actual turnover. For example, a discount for earlier payment makes sense only when it costs less than the cash shortfall and does not eliminate the transaction’s profit.
A seven-step action plan
- Create a consolidated registerReceivables, inventory, advances and payables should be recorded at the same date and broken down by age.
- Calculate turnover daysCompare amounts and the number of days cash spends at each stage of the cycle.
- Identify the excessDo not cut working capital blindly: establish the minimum needed for uninterrupted sales.
- Assign responsibility for each areaSales manages customer payment terms, purchasing manages inventory and advances, and finance manages the payment calendar.
- Change terms for new transactionsCredit limits, staged payments, advances and delivery schedules are more effective than chasing debt after it becomes overdue.
- Check the cost of accelerationCompare early-payment discounts, factoring fees and loan costs in RUB.
- Review weeklyTrack overdue debt, slow-moving stock, advances and peak cash balances alongside revenue and profit.
When internal improvements are not enough
Financing can be justified when a shortfall reflects a clear, profitable timing gap rather than a continuing cash drain: buying stock before the season, fulfilling a contract, manufacturing products or giving a reliable buyer credit.
- Factoring — when cash is tied up in confirmed receivables and the buyer pays later.
- Revolving credit facility (RCF) — when the need recurs and funds are required in drawdowns within the operating cycle.
- Overdraft — for short, irregular gaps with stable account receipts.
- Term loan — when the required amount and term are known in advance and the limit does not need to revolve.
Before applying, separate what can be released through better management from what genuinely needs financing. Otherwise, the business may borrow against old receivables or unsaleable stock and face the same shortage again a few months later.
When to seek help
A preliminary review is useful if revenue and profit grow while available cash shrinks, borrowing needs constant renewal, inventory grows faster than sales, customers regularly pay late, or the objectively necessary credit limit is unclear.
NG Finance can compare the operating cycle, account statements, receivables, inventory, existing debt and future payments, then assess whether releasing internal cash, using factoring, opening a revolving credit facility or choosing another tool makes most sense.
First identify cash within the business, then determine the financing limit
A preliminary assessment helps avoid using new debt to fund excess stock and overdue receivables. If external financing is needed, the application is built around a clear amount, term and repayment source.
Request a preliminary assessmentFrequently asked questions
Is negative working capital always bad?
No. In some models, customers pay immediately while suppliers allow credit. What matters is the stability of those terms and the ability to meet obligations on time.
Should all inventory be reduced?
No. Reduce excess and slow-moving balances while maintaining safety stock and the availability of fast-moving products.
Which is better: a customer discount or factoring?
Compare the full cost in RUB, the acceleration period, the margin impact and non-payment risk. There is no universal answer.
Can all payables be treated as free financing?
No. Include only normal contractual terms. Overdue amounts owed to suppliers, tax authorities or employees are a risk rather than a sustainable funding source.
Why is there profit but no cash?
Cash associated with profit may be tied up in receivables, goods, work in progress, advances or capital expenditure. Reconcile the income statement with the balance sheet and cash movements.
How often should working capital be recalculated?
For management purposes, at least monthly. With seasonality, rapid growth or cash flow gaps, review key items weekly.
Sources and further reading
- Bank of Russia — factoring as a source of working capital financing
- Federal Tax Service — State Information Resource for Financial Statements
- NG Finance — management reporting: income statement, cash flow report and balance sheet
This material is for information only. The example is simplified and does not account for individual contract terms, taxes, seasonality, asset quality or financing costs. Base decisions on inventory, payment terms and borrowing on the business’s actual economics.