The Silent Killer of Profitability: Working Capital Mismanagement

Profitability issues rarely start with plummeting sales or soaring costs. Often, the true culprit is far more subtle — and more dangerous. It’s working capital mismanagement.

Understanding the Beast

Working capital — your current assets minus current liabilities — powers your daily operations. Mismanage it, and you’re robbing your business of the fuel it needs to grow and survive.

Signs You're in Trouble

• Inventory sits too long, tying up cash and increasing storage costs.
• Receivables remain uncollected beyond agreed terms.
• You’re paying suppliers faster than collecting from customers.
• Your short-term debt increases, despite reported profits.

Why It’s So Dangerous

Unlike an expense spike, working capital leaks are hard to spot on the income statement. Cash flow dries up slowly. Teams continue reporting profits while your bank account bleeds.

Historical Case: The Fall of Polaroid

In the 1990s, Polaroid, the photography giant, reported healthy sales — yet it faced severe cash crunches. Why? Overproduction inflated inventory. Receivables ballooned. By the time cash issues surfaced, it was too late. Poor working capital management accelerated its downfall.

How to Take Control

• Receivables discipline: Align credit terms with risk and follow up relentlessly.
• Inventory optimization: Implement demand forecasting and lean principles.
• Payables management: Use the full extent of vendor terms, without damaging relationships.
• Cash conversion cycle monitoring: Make it a core KPI — not just a month-end metric.

Tools That Help

Modern ERP systems (like Odoo or SAP Business One) help track the lifecycle of cash, from PO to invoice to bank. FP&A teams must integrate these systems to get real-time visibility.

The Middle East Perspective

In the GCC and Egypt, long customer payment cycles are common, while suppliers often demand early settlement. This cultural and economic dynamic makes working capital discipline even more critical.

Action Plan

1. Segment your receivables by age and customer.
2. Review inventory turnover by SKU and location.
3. Map payment terms and actual behavior across key vendors.
4. Calculate your cash conversion cycle monthly — and compare it with peers.

Final Thought

Profit is theory. Cash is real. And working capital is the bridge. Mismanage it, and your business won’t stumble — it will silently starve.