Manufacturing working capital: where the money sits and how to free it

Why working capital is the factory’s quiet cash drain

Every pound of working capital that sits in raw yarn, unfinished fabric or unpaid invoices is a pound that cannot pay wages, settle supplier bills or fund the next production run. For a typical textile plant turning £10 m a year, a 10-day reduction in inventory days can free £270 k of cash without a single new order. The money is already in the business; it is simply trapped in the wrong place.

Most owners track the balance-sheet line for working capital but rarely break it down into the two components that matter: inventory days and receivable days. These metrics show exactly where the cash is tied up and, more importantly, which levers can be pulled this month to release it.

Inventory days: the hidden cost of every extra day on the shelf

Inventory days measure how long stock—raw, work-in-progress or finished—sits before it is sold or converted. The formula is straightforward:

Inventory days = (Average inventory value ÷ Cost of goods sold) × 365

For illustration, take a dyehouse with £2.5 m of average inventory and £18 m of annual cost of goods sold. Inventory days = (£2.5 m ÷ £18 m) × 365 = 51 days. If the same dyehouse can reduce average inventory to £2.2 m without affecting output, inventory days drop to 45 days, freeing £300 k of cash.

Inventory days split into three segments, each with its own levers:

• Raw-material days are driven by supplier lead times, minimum order quantities and incoming quality control.
• Work-in-progress days depend on batch sizes, machine changeovers and in-process quality checks.
• Finished-goods days reflect sales forecasting, credit terms offered and despatch efficiency.

Fugen ERP tracks every batch and rack in a single stock ledger, so the average inventory value is always up to date and never inflated by parallel spreadsheets.

Receivable days: the other half of the cash equation

Receivable days measure how long customers take to pay. The formula is:

Receivable days = (Average receivables ÷ Annual revenue) × 365

A garment factory with £1.2 m of average receivables and £12 m of annual revenue has receivable days of 37. If the same factory can collect invoices 5 days faster, it frees £164 k of cash. Unlike inventory, receivables are not physical stock; they are promises on paper, so the levers are behavioural and contractual.

Common causes of high receivable days include:

• Credit terms that are longer than the industry standard without compensating discounts.
• Invoices that are delayed or disputed because of missing delivery notes or quality certificates.
• Approval chains that require multiple signatures before payment can be released.
• Customers who pay only when chased, because no systematic follow-up exists.

Fugen ERP links every invoice to its delivery note and customer ledger, so disputes are resolved in hours, not weeks, and the receivables ageing report is always accurate.

Batch sizes: the lever that cuts work-in-progress days

Smaller batches move through the plant faster, reducing work-in-progress days and freeing cash. The trade-off is higher changeover time, but in most textile and garment plants the changeover cost is outweighed by the cash benefit.

For example, a weaving shed running 100-loom shifts can switch from 5 000 m to 2 500 m batches. If the changeover time is 30 minutes per batch, the shed loses 0.5 hours per 2 500 m, or 1 hour per 5 000 m. The net changeover time is the same, but the average work-in-progress inventory is halved. At a cost of £1.20 per metre, the cash released is £3 000 per batch.

Fugen ERP routes every order through the plant, so batch sizes can be adjusted without losing traceability or costing accuracy.

Supplier terms: the quiet cash source in the purchase ledger

Extending supplier payment terms from 30 to 45 days is equivalent to a zero-interest loan. The key is to negotiate the extension without damaging the relationship or incurring hidden costs such as higher unit prices or slower deliveries.

Tactics that work include:

• Offering to pay on a fixed day of the month instead of net 30, which gives the supplier predictable cash flow.
• Committing to larger annual volumes in exchange for longer terms, provided the volumes are realistic.
• Using an ERP system to track supplier performance, so the negotiation is based on data, not guesswork.

Fugen ERP ties every purchase order to its goods receipt note and supplier bill, so the payables ageing report is always up to date and the negotiation is grounded in facts.

Approval workflows: the bottleneck that delays cash

Every day an invoice sits in an approval queue is a day the cash is delayed. In a plant with £5 m of annual purchases, a 3-day approval delay ties up £41 k of cash. The solution is to set approval slabs that match the risk, not the hierarchy.

For example:

Fugen ERP lets the factory define these slabs and levels, so the approval chain is enforced in the API, not just on paper.

What to do next week

Start with the numbers. Calculate inventory days and receivable days for the last three months. If the numbers are rising, pick one lever from each list below and implement it within seven days.

For inventory days:

• Reduce the safety stock of the top three raw materials by 10 % and monitor production for shortages.
• Switch one high-volume product from weekly to daily production batches and measure the cash impact.
• Run a stock-take of finished goods and write off or discount slow-moving items.

For receivable days:

• Call the top three customers who pay late and ask for a 5-day improvement in exchange for a small discount.
• Set up a weekly receivables ageing report and assign one person to chase overdue invoices every Friday.
• Shorten the credit terms for new customers by 7 days and monitor the impact on order volume.

If the numbers are already tight, the next step is to automate the tracking. An ERP system that posts inventory and receivables automatically from operations will keep the metrics up to date and highlight the next cash opportunity before it becomes a problem.