The P&L looks fine. Revenue is up, gross margin is holding, the accountant is not worried. And yet payroll week arrives and you are staring at the account wondering how a profitable business can feel this tight.
This is one of the most common situations I see with manufacturing founders. Profitable on paper. Cash-constrained in practice. The two are not contradictory — they are a predictable consequence of how manufacturing businesses are structured.
The Gap Between Profit and Cash
Profit is an accounting concept. Cash is what you actually have in the bank. In a service business, the gap between the two is usually small — you invoice, the client pays, the cycle is short. In manufacturing, the gap can be months wide.
Here is a realistic example. A manufacturing SME with €2M annual revenue — roughly €167,000 a month. The business is profitable, with a net margin of around 8%, so approximately €160,000 in net profit for the year. On paper, that is a healthy operation.
Now add the working capital reality: 45-day customer payment terms, 30-day supplier payment terms, and €80,000 tied up in raw material and finished goods inventory at any given time. The business is funding a 15-day payment gap on €167,000 of monthly revenue, on top of inventory that has already been paid for but not yet sold.
That gap — between when you pay out and when you get paid back — is called the cash conversion cycle. In manufacturing, it is almost always longer than founders expect.
How the Numbers Stack Up
Take the €2M business. At 45-day customer terms, roughly €250,000 of revenue is outstanding at any point — invoiced but not yet collected. At 30-day supplier terms, around €100,000 is owed to suppliers. With €80,000 in inventory, the business has approximately €230,000 of working capital tied up at all times.
That €230,000 is not idle. It is working — it is enabling the business to operate. But it is not in your account. It is in the gap between supplier payment and customer collection.
The business is not short on profit. It is short on timing. Those are two completely different problems with two completely different fixes.
When revenue grows, the gap grows with it. A business that goes from €2M to €3M without addressing working capital structure will feel more cash pressure at €3M than it did at €2M — even though it is more profitable in absolute terms. Growth makes the problem bigger.
Where the Cash Actually Goes
Three places account for most of it.
Receivables. Your customers are, effectively, borrowing from you interest-free. Every invoice that sits unpaid for 45 days is a loan you did not agree to make. If your payment terms are 30 days and your actual collection is running at 45, that 15-day gap on €167,000 of monthly revenue is €83,000 you are waiting for.
Inventory. Raw material sitting in a warehouse is cash that has already left your account. Finished goods waiting to ship are doubly painful — you have paid for the material and the labour, and you are waiting to invoice. Typical inventory tie-up in a manufacturing SME at this scale runs €60,000-€100,000. It is often the single largest working capital item on the balance sheet.
The supplier timing mismatch. You pay your suppliers in 30 days. Your customers pay you in 45. That 15-day structural gap means you are always funding 15 days of your own revenue cycle. At €167,000 per month, that is approximately €83,000 you are permanently carrying.
What to Look at First
The cash conversion cycle is the metric that makes this visible. It is calculated as: days inventory outstanding, plus days sales outstanding, minus days payable outstanding. For the €2M business above, a realistic number is 60-75 days. That means the business needs roughly two months of revenue in working capital just to function normally.
If you do not know your cash conversion cycle, that is where to start. Not with the P&L — with the balance sheet dates.
Three things to check this week: your average collection days against your stated payment terms, your current inventory value relative to monthly cost of goods, and your actual supplier payment timing. Those three numbers will tell you where the gap is and how big it is.
Profitable businesses run out of cash when the timing gap is wider than the bank account can absorb. That is a structural problem, not a profitability problem. And it has a structural fix — but only once you can see where the gap actually sits.
Profitable but always tight on cash?
I work with manufacturing founders across the Benelux on exactly this. One conversation, your actual numbers — we find the gap and what to do about it.
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