Working capital is not a fixed number
It changes with your sales volume, your collection cycle, and your business model. Calculating it correctly is the difference between scaling in a healthy way or growing and going bankrupt at the same time.
The basic formula
Working capital = Current assets - Current liabilities
But to know how much you need to grow, the right question is different: how many days pass between the moment you produce and the moment you get paid?
The cash conversion cycle
- Days of inventory: average time the product sits in the warehouse
- Days of accounts receivable: how long it takes your customer to pay you
- Days of accounts payable: how long it takes you to pay your suppliers
Cycle = Inventory days + Receivable days - Payable days
If your cycle is 45 days and your average daily sales are $100,000 MXN, you need at least $4.5M MXN in working capital just to operate at your current level. To grow 30%, you would need $5.85M MXN.
Signs your working capital is insufficient
- You pay suppliers late even though you have sales
- You turn down orders because you lack inventory or capacity
- Your cash flow has recurring "dips" every month
- You rely on informal credit or personal cards to cover gaps
How to finance additional working capital
- Factoring: if the bottleneck is in accounts receivable
- Revolving credit: to cover seasonal fluctuations
- Working capital line: a fixed term amount, ideal for planned growth
The practical rule
Before committing to a large contract or a new client, calculate the additional working capital you will need. If you don't have those resources, secure financing before signing.