For every business · Explainer
What is working capital, and why does a profitable business run out of it?
Working capital is the cash your business needs to keep trading while it waits, for an anchor to pay you, or for stock to sell. Profit on paper does not pay this week’s wages; cash does.
In short
- Working capital is the cash that keeps you trading between paying out and being paid.
- A profitable business can still run short, because its profit sits in unpaid invoices and unsold stock.
- Suppliers wait at the end of the trade and distributors at the start, so each side needs different products.
The money that is tied up while you trade
Every trade has a gap in it. You spend first (on stock, materials, wages, transport) and the money comes back later. Working capital is what fills that gap: the cash you need in hand so the business keeps running between paying out and being paid.
The size of the gap depends on three things. How long your cash sits in stock. How long you wait for the businesses you sell to to pay you. And how long the businesses you buy from give you to pay them. Lengthen the first two or shorten the third, and you need more cash just to stand still.
Why profit is not cash
A business can sell more than ever, show a profit, and still be unable to pay wages on Friday. The profit is real, but it is sitting in an invoice the anchor has not paid yet, or on a shelf as stock that has not sold. Growth makes this worse, not better: every extra order needs cash up front before it brings any back.
This is the trap most businesses on this platform are in. It is not a sign of a badly run business. It is the normal shape of trading with a large company, whose payment terms and order sizes are set for its own cash cycle, not yours.
What it looks like on each side
If you sell to an anchor, the gap is at the end of the trade. You have delivered, the invoice is approved, and the money you have earned is not yet yours to spend. That is the supply side, and suppliers wait to be paid.
If you buy from an anchor, the gap is at the start. You need to pay for stock before it sells, and the cash you hold (not demand) decides how much you can order. That is the buy side, and distributors wait for stock to turn.
Both are working capital problems. They need different products with different obligations, which is why everything on this site asks which side you are on before anything else.
Where supply chain finance fits
Supply chain finance uses the trade itself (the approved invoice, the confirmed order, the relationship with your anchor) to bridge the gap. Rather than assessing you on a balance sheet you may not have, the financier builds the financing around a transaction the anchor has already confirmed. What that means for what you owe differs by product, and each product page says who carries the obligation.
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