Working capital: how much cash do you need as you grow?

Filiz Hanım's big order

The rules described in this lesson are those of Turkish law.

Filiz Hanım's textile workshop runs steadily. Every month it turns out 540,000 lira of work excluding VAT; fabric, labour, rent and other costs come to 450,000 lira a month. That leaves 90,000 lira of profit a month.

A clothing chain has brought an offer: 540,000 lira of extra work every month, paid on 90-day terms. The sums look easy: "Profit will double."

Profit really may double. But for the first three months not a single kuruş comes into the cash box from this customer, while the costs start on day one. In this lesson we measure the money in between. In accounting, working capital (işletme sermayesi) is a broad idea related to the current assets on the balance sheet (bilanço); the meaning we use in this lesson is narrower: the money tied up in receivables and stock to keep the business turning, which is not covered by your supplier's credit period.

The haulier's second lorry

When a haulier buys a second lorry, he works out the price of the lorry. What he often forgets is the second lorry's diesel, motorway tolls and the driver's salary. These are paid before every trip; the freight charge comes in only when the customer pays. A second lorry also needs a second diesel kitty.

Working capital is this diesel kitty. It is not a permanent investment like a machine or a shop. It is the money that stays inside the business all the time as long as the business keeps turning.

The short way to work out tied-up money

In the lesson Cash conversion cycle you worked out the cash conversion cycle: the customer's payment days, plus the days goods wait, minus the days your supplier gives you. You also saw tied-up money there: receivables, plus stock, minus what you owe suppliers.

For a new piece of business, the short way is this:

Tied-up money ≈ daily cash spending × cash conversion cycle

Filiz Hanım's current business:

With the new customer:

Sales double. Tied-up money, however, goes from 900,000 to 2,250,000 lira, two and a half times as much. The difference comes from the new customer's longer credit period.

The short way is an approximate calculation. Not all costs are paid on the same terms; salaries go out at the end of the month, rent at the start. Your 13-week plan gives the exact figure. But to see the order of magnitude before deciding, the short way is enough.

VAT waits inside too

The new customer pays the money together with the VAT 90 days later. You, however, pay the VAT on the 28th of the month following the month in which you made the delivery and issued the invoice; if the 28th falls on a holiday, on the first working day (there is no VAT under simplified taxation, basit usul). As you saw in the previous lesson, VAT does not wait for the money.

In 2026 the general rate is 20%. In the new business, the VAT on the invoices is 108,000 lira every month. After deducting the VAT on the fabric, say 54,000 lira of VAT remains payable. The fabric VAT you deduct is also 54,000 lira, and you paid it to the fabric supplier when you bought the fabric; that too waits, out of your cash box, until the customer pays. A rough calculation: the fabric VAT stays inside for three months, from the day it is paid to the fabric supplier until the customer pays (3 × 54,000 = 162,000), and the 54,000 lira paid to the tax office for a month and a half (about 80,000). The money tied up by VAT is around 250,000 lira. Work out your own figure with your mali müşavir (accountant); the VAT you pay on purchases and can deduct varies with your business.

Where will this money come from?

Filiz Hanım has 400,000 lira in her cash box. The need, including VAT, is around 1,600,000 lira (1,350,000 + 250,000). For the 1,200,000 lira in between, the options in front of her:

We discuss the cost of a loan and other ways of financing, such as leasing, separately in this level's growth decisions module, in the lesson A loan, leasing or your own money?. The rule to keep in mind here is simple: if the total cost of financing is greater than the extra profit the new business will bring, the order brings workload, not profit.

Two questions for the decision

Before answering the offer, Filiz Hanım answers two questions with figures:

1. Does the new business make a profit? Is the extra profit greater than the cost of financing?
2. Can my cash box carry it? In the 13-week plan, does the lowest week fall below the cash reserve (kenar parası)?

The first question belongs to the income statement (gelir tablosu), the second to the cash plan. If the answer to either is "no", you don't have to turn the order down; it is time to talk about the credit period, an advance or the starting quantity.

In the end Filiz Hanım agreed with the chain on 60-day terms and half the quantity for the first three months. She updates her tied-up money calculation every month. As sales grow, tied-up money will grow too; she knows this in advance as well.

A note: profit and capital are different things

In a year when profit is recorded during a growth period, it is not surprising to see less money in the cash box. The profit is waiting in receivables and stock. You saw this in the lesson Profit but no cash. The difference is this: this time the waiting money is the price of the business's growth, and it can be calculated in advance.