The working-capital cycle, and why timing is the whole problem.

The gap

A trading or manufacturing business pays for stock, holds it, sells it, and then waits to be paid by customers. Cash leaves before it returns. That gap — the working-capital cycle — is not a sign of a badly run business; it is a normal feature of trading. The problem is only ever its size and its timing.

The three clocks

Roughly, the longer the first two relative to the third, the longer cash is tied up in the cycle, and the larger the working-capital requirement.

• Inventory days — how long stock sits before it is sold.
• Receivable days — how long customers take to pay after the sale.
• Payable days — how long you take to pay your own suppliers.

Why the gap widens

Slow collections, ageing stock and seasonal demand all stretch the gap. A busy season can be the most cash-hungry time of year, because you buy and hold more stock before the sales arrive. This is why a business can be profitable on paper and still short of cash.

Matching finance to the gap

Working-capital finance exists to bridge the cycle: a cash credit or overdraft sized to the gap, drawn when needed and cleared as collections come in. A term loan is the wrong tool here — it repays on a schedule that does not move with the cycle, and using a limit for long-term needs means paying for them indefinitely.

Managing it

• Chase receivables before they age, not after.
• Keep stock current, because old stock stops counting towards the borrowing base.
• Plan for the lean season, when inflows slow but obligations do not.
• Size the limit to the real peak, not to optimism.

What the lender reads

The lender reads the cycle to size the limit genuinely needed, and to see whether the business can bring the account back to credit. Regular, explainable inflows are what make a revolving facility safe to lend against — for both sides.