Cash tied up in production. How should industrial companies calculate their capital needs?

Growth in production does not always mean greater financial comfort. An industrial company may have more orders, higher capacity utilisation and growing sales, while still needing more cash for everyday operations. Before a finished product is sold and paid for, the business must finance materials, components, energy, labour, machine servicing, storage and logistics.

This is how capital becomes tied up in production. It is not automatically a loss, but it places real pressure on cash flow. Money leaves the bank account long before it returns through a customer payment. The more production cycles overlap, the more cash the company may need to maintain operations.

The pressure becomes even stronger when sales grow but margins decline. The company then finances a larger operating scale while retaining a smaller buffer from every unit of revenue. The key question is therefore not only whether the new order is profitable. The company must also establish how much cash it will commit before the customer pays and how many similar orders it will be delivering at the same time.

Sales are growing, but margins are falling. What does this mean for cash?

Recent data from the food industry shows why revenue growth alone is not enough to assess a manufacturer's financial position. According to information published by Puls Biznesu based on a BGK report, revenue in the Polish food processing industry reached PLN 93.39 billion in the first quarter of 2026, an increase of 6.2% year on year. At the same time, sector EBITDA fell by 2.8%, from PLN 8.17 billion to PLN 7.94 billion, while the EBITDA margin decreased from 9.3% to 8.5%. See the data on the performance of the food industry.

This does not mean that the entire sector is in crisis. According to the same source, the proportion of profitable businesses increased from 77.7% to 85.4%, the current ratio rose to 1.76 and net debt to EBITDA remained low at 0.45. The figures point to pressure on financial performance rather than widespread insolvency.

The conclusion is nevertheless important for an individual company. Higher sales may require more raw materials, additional production shifts, higher inventory and a larger value of receivables to be financed. If the margin declines at the same time, the business has less room for a late payment, an increase in costs or a calculation error.

Why can production grow while cash is still tight?

In a manufacturing company, costs often arise much earlier than inflows. Raw materials must be ordered before work begins. Components need to be available on time. The team must be paid regardless of whether the customer has already paid. Machines require servicing, while energy, transport and storage generate ongoing expenses.

Higher production can therefore mean higher future revenue but also larger expenses today. The company commits more capital to inventory, work in progress and operating costs before it can issue an invoice.

We also explain this mechanism in our article about the situation in which production is growing, but cash is still tight. Increased operating activity does not always improve cash flow immediately. It often increases the need for cash first.

Where does cash most commonly become tied up in production?

Cash may remain committed at several stages of the process at the same time. The company sees work, orders and growing sales, but it may not see the full amount already spent before the customer payment arrives.

Materials show how much cash must be spent before production begins. Work in progress represents the cost of a process that cannot yet be settled. Finished goods are capital waiting for collection or sale. Receivables arise when the company has completed the work and issued an invoice but has not yet received the money.

Only by combining these stages can the company see how much capital it has really committed and how long that money will be unavailable for other purposes.

How do you calculate the cash conversion cycle?

The cash conversion cycle can be used to assess how long capital remains tied up. It shows the number of days between committing money to inventory and recovering it through customer payments, after allowing for the time the company has to pay its suppliers.

For example:

• materials, production and waiting for acceptance take 45 days
• the customer pays 45 days after the invoice is issued
• the company pays its suppliers after 20 days

The cash conversion cycle is therefore 70 days:

45 days + 45 days - 20 days = 70 days

This means that the company must finance approximately 70 days of the cycle. The indicator does not automatically show the amount required. To calculate that figure, the company must also establish which expenses fall within the period it finances and how many cycles are running at the same time.

How do you calculate the capital required for a production cycle?

The simplest question is: how much money must the company commit between the first payment for materials and the moment it receives payment from the customer?

In practice, the calculation should include:

• the cost of materials and components
• supplier payment terms
• labour, energy, servicing, subcontractor and logistics costs
• production and storage time
• the product collection or acceptance date
• the date on which the invoice can be issued
• the actual customer payment date, not only the contractual due date
• advances and stage payments that reduce the company's own contribution
• fixed costs maintained at the same time
• other orders financed during the same period

A simplified formula may look like this:

Capital requirement = expenses incurred before the inflow + minimum operating buffer - customer advances - supplier credit

This approach differs from asking about a general cash reserve. Here, the company establishes how much money is committed to a specific cycle, when it will return and whether another production cycle will begin before that happens.

Example: an order requires PLN 270,000, but this is not the full gap

A manufacturing company accepts a larger order. Before work begins, it purchases raw materials and components for PLN 180,000. Over the next 35 days, it incurs another PLN 90,000 in labour, energy, servicing and logistics costs. Once production has been completed, the company delivers the goods and issues an invoice with a 45-day payment term.

The peak cash commitment for this one order is approximately PLN 270,000. However, that may not represent the company's full requirement. If another batch begins before the customer pays for the previous one, the cycles start to overlap.

What happens when the company starts a new order every 30 days?

Assume that every order has the same cost profile. A new order begins every 30 days, materials cost PLN 180,000 and are paid for at the start, while the remaining PLN 90,000 accrues evenly over 35 days. The customer pays 45 days after production is completed, which is approximately 80 days after the cycle begins.

In this simplified model, one order requires a maximum of PLN 270,000, but a growing company may commit approximately PLN 769,000 to three parallel cycles before the first payment arrives. This amount excludes VAT, some fixed costs, a customer delay and any additional buffer. If the payment period moves from 45 to 60 days, another cycle may begin before cash from the first one has been released.

This is why a growing order book can increase pressure on the bank account. The company is not financing a single batch. It is financing the gap between multiple expenses and multiple later inflows.

When does growing production increase liquidity risk?

Risk increases when the company scales costs faster than inflows. This is particularly common when suppliers expect short payment terms while customers pay only after acceptance or after a long invoice period.

Other relevant factors include:

• inventory held without confirmed demand
• materials purchased far in advance
• a long or unstable production time
• no customer advances or stage payments
• declining margins
• sales concentrated on one customer
• delays in collection, acceptance or payment
• new cycles starting before earlier ones have been settled

More production activity does not always mean more available cash. Sometimes it means higher inventory, greater costs and a larger value of receivables. It is therefore important to remember the difference between cash flow and profit. Profitability shows whether the activity can generate a profit. Cash flow shows whether the company has money when it needs to pay employees, suppliers and public authorities.

How can a company distinguish a healthy cash gap from a profitability problem?

Not every case of tied-up cash is harmful. Some capital naturally works in materials, production and receivables. The position is safer when the margin remains positive, the customer is confirmed, the payment date is predictable and the company knows how it will finance the period before the inflow.

If the problem results from oversupply and a price that does not cover the full cost of production and sale, financing may only increase the loss. We examine this mechanism in detail in our article on the bumper harvest paradox and why larger crops can mean lower earnings.

What can shorten the time for which cash remains tied up?

More financing should not always be the first answer. Sometimes the best solution is to reduce the time for which money remains outside the bank account.

The following may help:

• customer advances
• stage payments linked to production progress
• faster collection and acceptance
• shorter production and changeover times
• better inventory planning
• renegotiated supplier payment terms
• lower excessive stock levels
• faster invoice issuance
• regular monitoring of customers' actual payment behaviour

It is also worth calculating the value of one day in the cycle. If the company incurs PLN 4.8 million in annual production-related cash costs, it commits an average of approximately PLN 13,200 per day. Shortening the cycle by 10 days may release approximately PLN 132,000 in capital under this simplified calculation.

Without an up-to-date view of invoices, costs, liabilities and payment dates, the company may notice too late that the cycle is consuming more cash than expected. This is why organised invoices, costs and financial data matter not only for accounting but also for operational decisions.

When might a manufacturing company need financing?

Financing may help when the company has a profitable order and a credible source of repayment but must incur costs before receiving money from the customer. Examples include a larger production batch, seasonal sales growth, joining a new supply chain, purchasing materials in advance or maintaining safety stock.

Before making a decision, the company should check:

• the full value of the gap, not only the cost of the first order
• the number of cycles that will run at the same time
• a conservative margin after all costs
• the realistic production start and completion dates
• acceptance, complaint and payment terms
• a late-payment scenario
• the cost and repayment schedule of the financing
• the effect of the new obligation on the rest of the business

If the need results from a larger order or entry into a larger supply chain, it is worth viewing working capital as growth infrastructure. External capital should support a specific, temporary gap. It should not replace profitability or repeatedly finance the same permanent shortfall.

Invoice or contract - at what stage does the gap arise?

The solution should depend on the moment at which the company needs cash.

If production has been completed, the goods delivered and an invoice issued with a deferred payment term, the problem is a receivable. Financing a single invoice may then be considered.

If the company has a signed contract that will generate a series of invoices, it may need financing for the entire schedule. PaveNow finances single invoices and full B2B contracts from PLN 50,000 to PLN 2 million. The financing is based on a disclosed assignment of receivables, so the agreement with the customer must allow assignment or the customer must provide consent. Details and current terms are available on the invoice and contract financing page.

In some situations, particularly when the capital need is larger and longer, company assets may also matter. If the business owns real estate and does not want to sell it, it may also review business financing secured by real estate. The selected solution should reflect the purpose, amount, time required to release cash, cost of capital and source of repayment.

What should financing not conceal?

Financing should not conceal unprofitable projects, excessive inventory or production started without a confirmed buyer. It cannot replace cost control, customer negotiations and margin analysis.

Particular caution is required when:

• every new order makes liquidity worse
• the company does not know the full cost of the product
• repayment depends on a perfect schedule with no delays
• the funds are intended to cover growing inventory continuously
• new financing repays an earlier obligation without changing the business model
• the achievable selling price does not cover production, storage and capital costs

Appropriately structured financing may help a company manage higher working capital requirements when the business model is healthy and cash will return through predictable inflows. Poorly matched financing will only increase pressure in the following months.

How does PaveNow assess cash tied up in production?

At PaveNow, we analyse the purpose of financing, cash flows and the source of repayment. In a manufacturing company, the value of its orders is not the only relevant factor. The entire cash cycle matters, including the purchase of materials, labour and energy costs, invoice issuance and customer payments.

If the gap arises from a profitable contract or a credible receivable, financing may be linked to a documented future inflow. However, if production has no confirmed buyer, the margin does not cover the costs or successive cycles deepen a permanent shortfall, additional capital may postpone the problem rather than solve it.

The company should know:

• how much money it needs
• exactly when it needs the funds
• what will cause the cash to return
• what the result will be after the cost of financing
• what will happen if production or payment is delayed

In manufacturing, the question is not only whether the company has orders. It also needs to know whether it has enough cash to deliver them safely without blocking the rest of its operations.

Summary

Growing production may increase future revenue while committing more capital to materials, work in progress, finished goods and receivables. If new orders begin before earlier ones have been paid for, the actual cash requirement may be many times greater than the cost of one cycle.

A manufacturing company should therefore calculate:

• the length of its cash conversion cycle
• the peak cash commitment for one order
• the number of parallel production cycles
• realistic acceptance and payment dates
• the full margin after production, logistics and capital costs
• a delayed-payment scenario and minimum buffer

Financing may help close a temporary gap between costs and a predictable inflow. It should not, however, support production whose selling price does not cover the full cost or inventory for which the company has no credible buyer.