Working Capital
The cash a brand needs to fund the gap between paying suppliers and getting paid by customers. The reason profitable brands still run out of money.
Working capital is the cash a business needs to fund the gap between paying for inventory and collecting payment from customers. For a software company that gap barely exists. For a CPG brand, it can stretch four to nine months between writing the check to the manufacturer and receiving the final dollar from the retailer.
A brand can be profitable on paper and still go bankrupt because it ran out of cash to fund the next production run. Working capital is the difference. It’s the single most underestimated number in consumer packaged goods, and the reason most failed brands fail.
The Formula
Working capital, in accounting terms, is current assets minus current liabilities. Current assets are cash, inventory, and accounts receivable (money customers owe). Current liabilities are accounts payable (money owed to suppliers), short-term debt, and accrued expenses.
The number that matters for an operating brand isn’t the static balance sheet figure. It’s the operating cash gap: how much cash gets tied up in inventory and receivables before it converts back into available cash. This is sometimes called the cash conversion cycle, and for a CPG brand it usually looks like this:
- Pay the manufacturer. Money out, today, at production. A typical run is 60-180 days of forward inventory.
- Ship to a warehouse or 3PL. Inventory sits, sometimes for weeks, before it gets sold.
- Sell into retail or DTC. DTC payments arrive within 2-4 days. Retail payments arrive on net terms, which can mean 30, 60, or even 90 days after the retailer receives the shipment.
- Collect payment. The dollar finally returns to the brand, minus any retailer deductions, chargebacks, and returns.
The total cycle for a brand selling through specialty or mass retail typically runs 120 to 270 days. The brand needs enough working capital to fund every dollar of inventory and receivables sitting in that pipeline at any given time.
What CPG Founders Underestimate
Software founders look at gross margin and conclude that a 60% margin business is healthy. CPG founders learn that a 60% margin is healthy only if the business has the working capital to fund the gap. Two specific dynamics catch most first-time founders.
Growth makes the gap bigger, not smaller. Every additional dollar of revenue requires an additional dollar (or more) of inventory bought in advance. A brand doubling revenue typically needs to double its working capital position before the new revenue arrives. This is why scaling brands can be cash-negative even when they’re growing 100% year over year.
Retailer terms stretch the gap. A small DTC brand might collect cash in 3 days. The moment that brand enters Sephora, Target, or Whole Foods, payment terms shift to Net 60 or Net 90. The retailer holds the cash for 60-90 days while the brand has already paid the manufacturer. A 90-day stretch on a $500K wholesale order means the brand is financing $500K out of its own pocket until the retailer finally pays.
The second dynamic is what made Sephora a working capital problem for Ami Colé. The brand raised $3 million and tried to hold 600 doors. The capital required to keep those shelves stocked while waiting for Sephora’s payment cycle exceeded what the brand had raised.
How Much Working Capital a CPG Brand Needs
There’s no universal formula, but operators typically size working capital relative to forward COGS and growth rate. Rules of thumb that have held up across categories:
- DTC-only beauty or supplements brand growing 2-3x: 2-3 months of forward COGS available in cash.
- Brand entering specialty retail (Sephora, Ulta, Whole Foods): 4-6 months of forward COGS plus a buffer for slotting fees, co-op marketing, and retail chargebacks.
- Brand entering mass retail (Walmart, Target, Costco): 6-9 months of forward COGS, often $5M+ in standing working capital, because order sizes and net terms are larger.
A brand with $2M in annual revenue and 50% COGS needs $1M in annual production cost. At a 4-month working capital requirement, the brand needs roughly $330K in standing cash dedicated to working capital alone, plus separate reserves for marketing, payroll, and overhead. Founders raising on revenue projections without modeling this number are usually under-raising.
How Brands Fund Working Capital
Working capital can be funded with equity (the most expensive option), debt (cheaper but harder to access for early brands), or operational tactics that compress the cash cycle.
Equity. Seed and Series A rounds are often spent disproportionately on working capital rather than marketing or hiring. Founders who don’t understand this end up out of cash even after raising.
Debt. Revenue-based financing (Wayflyer, Clearco, 8fig), invoice factoring, and purchase order financing all exist specifically to bridge the working capital gap. Costs range from 6% to 20%+ APR depending on the brand’s revenue and the financier’s risk. Cheaper than equity, but only available to brands with revenue history.
Operational tactics. Negotiating better terms with the manufacturer (paying Net 30 or Net 60 rather than upfront) shifts the cash gap to the supplier. Negotiating shorter terms with retailers (Net 30 instead of Net 60) shifts it back the other way. Reducing inventory days through demand planning lowers the cash sitting in 3PL warehouses. These tactics compound: a brand that improves manufacturer terms, retailer terms, and inventory turn by 30 days each can free up months of cash.
Common Failure Modes
Mistaking profit for cash. A brand showing positive gross profit and a healthy P&L can be cash-negative because every dollar of growth requires another dollar of inventory. Founders who track only P&L miss the cash gap until they can’t make payroll.
Stretching too thin across retailers. Expanding into multiple retailers simultaneously multiplies working capital needs. A brand that could fund 100 doors comfortably often runs dry trying to fund 600.
Mismatched payment terms. Paying the manufacturer Net 30 while the retailer pays Net 90 creates a 60-day cash gap on every order. Without dedicated capital to fund that gap, growth itself becomes the problem.
Inventory that doesn’t move. Slow-selling SKUs tie up working capital indefinitely. Brands that don’t rationalize their SKU mix end up with cash trapped in product that won’t sell at full margin.
Frequently Asked Questions
What is working capital in simple terms?
Working capital is the cash a business needs to keep operating day-to-day, after paying suppliers but before getting paid by customers. For a product business, it’s mostly tied up in inventory and accounts receivable. The simpler version: it’s the money you’ve already spent but haven’t gotten back yet.
How do you calculate working capital?
The accounting formula is current assets minus current liabilities. For operators, the more useful number is the cash conversion cycle: days inventory outstanding plus days receivables outstanding minus days payables outstanding. The result is the number of days each dollar of working capital is tied up before returning as cash.
Why do profitable brands run out of money?
Because profit is measured on the income statement (when revenue is earned) while cash is measured on the bank statement (when it’s actually collected). A brand can earn $1M in profit on paper while having no cash because every dollar of profit is tied up in inventory or receivables. Growth amplifies this gap because growing revenue requires growing inventory.
What is the difference between working capital and cash flow?
Working capital is a snapshot of the cash position needed to fund operations. Cash flow is the movement of cash in and out of the business over time. A brand can have strong working capital and weak cash flow (because growth is consuming cash) or weak working capital and positive cash flow (because the cycle is shrinking).
How do brands fund working capital?
Equity, debt, or operational tactics that compress the cash cycle. Revenue-based financing platforms like Wayflyer and Clearco are designed specifically for this. Traditional bank lines of credit work too, but most banks won’t lend against CPG inventory without significant collateral.
Sources
- Harvard Business Review, “The Cash Conversion Cycle,” 2020. Conceptual framework for measuring working capital efficiency.
- Beauty Independent, “Why Indie Beauty Brands Run Out of Cash,” 2024. Working capital pressure on growing CPG brands.
- Business of Fashion, “The Wholesale Cash Trap,” 2024. Net terms and working capital impact in beauty wholesale.
- Wayflyer, “The State of E-commerce Financing,” 2024. Revenue-based financing benchmarks for DTC and omnichannel brands.