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 better sales prospects, while still needing more cash for everyday operations. The reason is simple: before the finished product is sold and paid for, the company first needs to finance materials, components, energy, labour, machine servicing, storage and logistics.

This is where capital becomes tied up in production. It is not a loss, but it becomes a real burden on cash flow. A company may have orders, an active production floor and growing sales, while still feeling pressure on its bank account because money is tied up in raw materials, work in progress, finished goods or receivables from clients.

That is why manufacturing companies should look at growth not only through margin and order value, but also through capital needs. The key question is: how much cash does the company need to commit before it recovers that money from the client’s payment?

Why can production grow while cash is still tight?

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

As a result, higher production may mean higher future revenue, but also higher expenses today. The company produces more, but at the same time commits more capital to inventory, work in progress and operating costs.

This mechanism is clearly visible when production is growing, but cash is still tight. Increased operational activity does not always immediately improve cash flow. Sometimes it first increases the need for money.

Where is cash most often tied up in production?

In a manufacturing company, cash is usually tied up in several places at the same time. That is why the problem is not always visible immediately. The company sees orders, invoices and work on the production floor, but it does not always see how much money is already tied up in the process before the client’s payment arrives.

The first area is materials and components. If the company needs to buy raw materials in advance, order a larger batch, maintain a minimum inventory level or secure component availability, cash leaves the company before the finished product is made.

The second area is work in progress. This is the stage where the company has already incurred costs, but cannot yet issue an invoice or receive payment. Materials are already being used, people are working, energy is being consumed, but the product has not yet been delivered or accepted.

The third area is finished goods. The product may already be ready, but still waiting for transport, collection, quality control, client approval or the right delivery date. From the company’s perspective, this is still tied-up capital, because money will return only after the sale and payment.

The fourth area is receivables. The company has completed the work, delivered the product and issued the invoice, but the client pays only after 30, 60 or 90 days. At that point, the problem is no longer in production itself, but in the waiting time for the inflow.

Materials, work in progress and finished goods - three stages that should be calculated separately

To assess capital needs properly, the company should not put all production costs into one category. Cash tied up in materials works differently from cash tied up in work in progress, and differently again from cash tied up in finished goods.

Materials show how much money the company needs to spend before production starts. Supplier payment terms, minimum order quantities, raw material prices, seasonality, risk of component shortages and safety stock all matter here.

Work in progress shows how much cash the company commits to a process that has not yet generated sales. Production time, labour hours, energy, subcontractors, downtime, quality control and the possibility of staged settlement all matter here.

Finished goods show how much money is waiting to be recovered after production has ended. Delivery dates, logistics, storage, client acceptance, invoice issuance and payment terms all matter here.

Only by adding these three stages together can the company see how much capital it really commits to the production cycle.

How to calculate capital needs in the production cycle?

The simplest question is: how much money does the company need to commit from the first purchase of materials until the moment it receives payment from the client?

It is not only about the cost of producing the product. It is about the period during which that cost must be financed by the company. The same level of costs may be safe or risky depending on whether the money returns after 20, 60 or 90 days.

In practice, it is worth calculating:

• how much the materials and components needed for production cost,
• when they need to be paid for,
• how much labour, energy, servicing, subcontractors and logistics cost,
• how long production takes,
• when the product can be delivered or accepted,
• when the invoice can be issued,
• when the client will realistically pay,
• how many fixed costs the company must maintain at the same time.

This approach is different from the general question of a cash reserve. Here, the company is not only checking whether it can survive a weaker period. It is checking how much money is committed to a specific production cycle and when that money can return to the business.

Example: a larger production batch and delayed cash recovery

A manufacturing company accepts a larger order and increases the scale of work on the production floor. To start production, it needs to buy raw materials and components worth PLN 180,000. During execution, it incurs another PLN 90,000 in labour, energy, servicing and logistics costs. The product is ready after 35 days, but the client pays 45 days after acceptance.

This means that the company commits around PLN 270,000 to the production cycle before it receives the full inflow from the client. The order may be profitable, but for several dozen days cash is tied up in materials, labour and the finished product.

If, at the same time, the company is working on other orders, paying salaries, leases, taxes and suppliers, pressure may appear not because production is unprofitable, but because cash returns later than costs leave the company.

This is why, in production, it is necessary to calculate not only margin, but also the time for which capital remains tied up.

When does growing production increase liquidity risk?

Growing production increases liquidity risk when the company scales costs faster than inflows. This happens especially when suppliers expect short payment terms, while clients pay only after acceptance or after a long invoice payment period.

Risk also increases when the company needs to maintain high inventory levels, order materials far in advance, operate on a low margin or finance additional shifts without certainty about when the inflow will arrive.

The most dangerous situation is when the company confuses higher activity with financial security. More work in production does not always mean more cash in the company. Sometimes it means more inventory, higher costs and a longer wait for payment.

At this point, it is worth remembering the difference between profit and cash in the company. Profitability shows whether an order can generate a profit. Cash flow shows whether the company has money when it needs to cover costs.

How to distinguish healthy tied-up capital from a profitability problem?

Not every case of tied-up cash is bad. In production, part of the capital naturally works in materials, inventory and receivables. This is normal if the company has a healthy margin, a predictable payment cycle and knows when the money will return.

The problem appears when every new order makes the cash position worse. If the company produces more and more, but keeps postponing supplier payments, delays obligations, uses increasingly expensive financing or does not know how it will cover the next production cycle, sales growth alone will not solve the problem.

Healthy tied-up capital has three features: it is calculated, it has a predictable release date and it comes from profitable activity. Risky tied-up capital is chaotic, has no clear cash return date and hides margins that are too low or poorly structured commercial terms.

If such signals appear regularly, it is worth assessing the company’s financial condition more broadly than just through the account balance. The balance alone does not show whether the company has a healthy margin, control over obligations and enough predictability in cash flows.

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

Increasing financing is not always the first step. Sometimes the first step is to shorten the time during which cash remains tied up in production.

Advance payments from clients, staged payments, shorter product acceptance time, better inventory planning, renegotiated supplier terms or reduced excessive stock levels can all help. It also matters whether the company can quickly see where the money is actually stuck: in materials, work in progress, finished goods or receivables.

Without an up-to-date view of invoices, costs, obligations and payment dates, the company may notice too late that the production 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.

The sooner the company sees where cash is tied up, the easier it is to decide whether the problem can be solved through process improvements, negotiations or financing.

When might a manufacturing company need financing?

Financing can help when the company has a healthy business model, but needs capital for a larger production cycle. Examples include a larger batch of orders, seasonal sales growth, entering a larger supply chain, purchasing materials in advance or maintaining safety stock.

In this situation, additional capital can help maintain production without using up all operating cash. However, there is one important condition: the company should know how the financing will be repaid. The repayment source may be sales inflows, client payments, order execution or other predictable cash flows.

If the need for capital comes from a larger order, project or entry into a larger supply chain, it is worth looking at working capital as growth infrastructure. In many companies, access to capital determines whether growth can actually be delivered.

If the company is considering external capital, it is also important to understand when non-bank financing genuinely strengthens the company and when it only postpones the problem. Financing should support a specific, temporary gap, not replace profitability.

When can contract financing be a better solution?

Not every cash gap in production appears at the same moment. That is why the solution should depend on the stage at which the company needs capital.

If the company has already completed production, delivered the goods, issued the invoice and is waiting for payment, the problem concerns the waiting period after invoicing, not the financing of an earlier production stage.

If the gap appears earlier, before delivery or before the invoice is issued, the company may need financing for the cost of fulfilling the order. In this case, financing for a larger project, order or contract may be relevant. It is then worth checking how contract financing helps deliver a larger project without blocking cash.

What should financing not hide?

Financing should not hide projects that are unprofitable. It should also not replace cost control, client negotiations or margin analysis. If the company uses financing only to constantly subsidise production, the problem is deeper than liquidity itself. In that case, it is necessary to return to prices, material costs, inventory structure, payment terms and the organisation of the production process.

Well-matched financing helps the company get through a moment of increased capital need when the business model is healthy and cash will return from predictable inflows. Poorly matched financing can only increase pressure in the following months.

How does PaveNow look at cash tied up in production?

At PaveNow, we look at business financing through the lens of purpose, cash flows and the repayment source. In manufacturing companies, what matters is not only that production is growing, but also how the cash cycle works: when the company buys materials, when it incurs labour and energy costs, when it issues invoices and when it actually receives payments.

If the gap appears before the client’s payment arrives, financing should respond to a specific need: purchasing materials, increasing inventory, maintaining production or securing a larger operating cycle. In this situation, one possible direction may be contract financing, which helps the company maintain liquidity while delivering a larger order or project.

In some situations, company assets, such as real estate, may also matter. If the company owns assets but does not want to sell them, financing secured by real estate may help unlock additional capital for growth, liquidity or larger operating costs. 

The most important point is that financing should have a clear purpose, a realistic repayment source and be matched to the rhythm of the company’s operations. In production, the question is not only whether the company has orders, but whether it has enough cash to deliver them safely.

Summary

Growth in production can be a positive signal for the company, but it does not remove the need to control cash. The larger the scale of operations, the more capital may be needed for materials, components, work in progress, inventory, energy, labour, logistics and operational continuity.

A manufacturing company should know where cash is tied up, how long it remains outside the account and when it can return through the client’s payment. Only then can it assess whether production growth strengthens the business or starts increasing financial pressure.

The key is not to look only at order value and planned margin. In production, time also matters. If costs appear earlier than inflows, the company needs a clear plan for financing the production cycle without blocking everyday obligations.