Working Capital: Inventory, Receivables and Payables

Foundry Manufacturing can post a healthy profit and still struggle to make payroll. The reason is almost always working capital — the cash caught up in the day-to-day machinery of buying steel, machining parts, shipping them, and waiting to get paid. It has three moving parts: money customers owe you, goods sitting unsold, and money you owe suppliers. Learn how those three levers push cash around and you will understand why growth can drain a bank account, and how the gap between profit and cash shows up in real operations.

Working capital: the cash inside the operation

Working capital is current assets minus current liabilities — the short-term stuff you own minus the short-term stuff you owe. The part finance actively manages is the operating cycle: accounts receivable plus inventory, minus accounts payable. For Foundry that is receivables of $1.5M, inventory of $1.0M, and payables of $1.0M, which nets to $1.5M of cash tied up in the operation. That $1.5M is real money, but it is not in the bank — it is trapped in the cycle.

Three levers control how much cash gets trapped: accounts receivable, inventory, and accounts payable. Two of them soak cash up; one gives it back. Get them working together and cash flows freely; let them balloon and Foundry can be profitable and broke at the same time.

Accounts receivable: cash you’ve earned but not collected

Accounts receivable is money customers owe you for goods you have already delivered. You booked the sale, you counted the profit — but the cash is still in the customer’s account, not yours. Foundry sells $10M a year and carries $1.5M in receivables, which works out to a days sales outstanding (DSO) of 1.5 ÷ 10.0 × 365 ≈ 55 days: on average it waits nearly two months after shipping a part before the cash lands.

The longer customers take to pay, the more cash sits frozen in receivables. Chase invoices, tighten terms, or offer a small early-payment discount, and Foundry pulls that cash back sooner.

Inventory: cash sitting on the shelf

Inventory is cash you have converted into goods that haven’t sold yet — raw steel, work in progress, or finished parts. Foundry holds $1.0M of inventory against $6.0M of product costs, giving days inventory outstanding (DIO) of 1.0 ÷ 6.0 × 365 ≈ 61 days: metal sits on the shop floor for about two months before it ships as a finished part. Every unsold unit is money spent that hasn’t come back.

This is where a profitable company gets caught. Suppose Foundry builds an extra $1.0M of parts that don’t sell this period. Its profit is unchanged — the cost sits in inventory, not in cost of goods sold — but $1.0M of cash is now tied up, inventory days climb, the cash-conversion cycle lengthens, and the bank balance falls. Profit on paper, no cash in hand.

Accounts payable: a source of short-term cash

Accounts payable is money you owe suppliers for things they have already delivered. Here the arrow points the other way: until you pay, that cash stays in your account working for you. Foundry carries $1.0M of payables against $6.0M of product costs — days payable outstanding (DPO) of 1.0 ÷ 6.0 × 365 ≈ 61 days. In effect its steel suppliers finance about two months of materials, interest-free.

Stretching payables (within fair terms) frees up cash. This is why the same dollar can help or hurt depending on which lever it sits behind — receivables and inventory tie cash up, payables let it loose.

The cash-conversion cycle

Put the three levers on a timeline and you get the cash-conversion cycle — how many days your cash is trapped before it comes back:

days inventory + days receivable − days payable

For Foundry that is 61 + 55 − 61 = 55 days. Because Foundry holds inventory and pays suppliers on almost the same clock (≈61 days each), those two cancel, and the cycle comes down to the 55 days it waits to collect from customers. Cash leaves when it pays suppliers and only fully returns 55 days after the sale — so the faster Foundry grows, the more cash it must find to bridge that gap.

Remember: a profitable company can still run out of cash when receivables and inventory balloon. Foundry can build $1.0M of parts and lose no profit, yet still watch $1.0M of cash vanish into the warehouse until those parts sell.

Frees up cash or ties up cash?

Read each situation and decide which way it moves Foundry’s cash. Tap a card to flip it and check your answer.

Sort the items

Drag each item into the bucket it belongs to — or tap an item, then tap a bucket. Hit Check placement when you’re done.

How to use it

When a team celebrates record sales, the sharp follow-up is about cash, not just profit. Useful phrases: “Great top line — what’s it doing to our working capital?” “How many days are we holding inventory now?” “Are receivables growing faster than revenue?” “Can we stretch supplier terms without hurting the relationship?” If Foundry is growing fast and cash feels tight, the cash-conversion cycle is usually the culprit — every extra part sold on credit needs cash to fund it until the customer pays. Shortening the cycle, by collecting faster, holding less stock, or paying suppliers on fair terms, releases cash without earning a single extra dollar of profit.