This page is for a factory owner, a production manager, or a finance clerk who has to explain why a factory winning orders and making a profit on each one can still find cash tight. At work, a merchandiser or an owner often looks at a full order book and assumes the factory's cash position must be healthy too. It is not the same thing. This lesson mainly teaches the money flow: it separates the profit an order earns from the cash a factory must hold while that order is still being made and paid for.
Delta Garments runs Order A for Northline Apparel: 15,000 T-shirts worth USD 48,000, earning a real profit of USD 3,900. That profit is genuine. But between buying fabric and being paid, Delta Garments must fund the whole USD 48,000 out of its own pocket, or borrow it, for as long as the order takes to complete and be paid for. Without this skill, a factory grows its order book without checking whether it can actually fund the cash gap that growth creates, and can run short of cash even while every single order is profitable.
You need: the idea of a cash-flow gap and payment terms from lesson T01-C07-L04. You do not need any accounting qualification.
By the end of this lesson you can:
Not covered here: how to calculate the exact number of days cash is tied up (lesson T15-C04-L02), how to shorten that wait (lesson T15-C04-L03), and how a specific order's own payment terms change the picture (lesson T15-C04-L04).
| Term | Meaning |
|---|---|
| Working capital | The money a business needs on hand to keep operating while it waits to be paid for goods already made. |
| Cash flow | The movement of money into and out of a business over time, separate from how much an order is worth on paper. |
| Cash-flow gap | The length of time between a factory finishing production and actually receiving payment for that production. |
| Profit | The money left over after all costs are paid, out of a selling price. |
| Letter of credit | A bank promise to pay the factory once the shipping documents match the order. |
| Open account | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
Working capital is a standard accounting measure: current assets minus current liabilities. For a garment factory, current assets are mostly fabric and trims not yet used, garments in production or finished but not shipped, and invoices sent to buyers but not yet paid. Current liabilities are mostly unpaid supplier invoices and any short-term loans. The difference between the two is the cash a factory must have, or borrow, to keep its operations running while orders move through the factory and through the buyer's payment process. Working capital is never the same number as an order's profit, and confusing the two is the most common cash-planning mistake a growing factory makes.
A merchandiser meets several different shapes of this same pressure across a normal working week, and learning to recognise each one prevents a costly assumption from creeping into a cash-flow plan.
| What can differ | The shapes you will meet | Why it matters |
|---|---|---|
| Export order paid by letter of credit | Delta Garments funds Order A's whole USD 48,000 cost from fabric purchase until the letter of credit pays out at shipment. | Even a fast-paying export term still leaves a real gap between spending cash and receiving it. |
| Domestic order on open account | An equivalent-value domestic order for Cedar & Co. is paid 60 days after delivery, on top of the production period. | A slower payment term enlarges current assets (unpaid invoices) for longer, raising the working capital need for the same order value. |
| A factory taking on more orders at once | Delta Garments accepts two Order-A-sized orders in the same season instead of one. | Current assets roughly double at the same time; the cash needed to fund them does too, even though each order is separately profitable. |
| Make to Order versus Make to Stock | A Make to Order factory like Delta Garments only builds inventory against a confirmed order; a Make to Stock brand builds inventory ahead of confirmed sales, from its own forecast. | A Make to Stock business can carry inventory for longer before any sale exists at all, which is its own separate working capital pressure. |
Delta Garments' Order A earns a real profit of USD 0.26 per piece. But profit is only what is left over once the order is finished and paid for. Long before that point, Delta Garments has already spent cash on fabric, trims and labour for all 15,000 pieces, and that spent cash sits inside the factory first as raw fabric, then as cut and sewn garments, then as finished goods waiting to ship, then as an unpaid invoice to Northline Apparel, until the letter of credit finally pays out. During that whole stretch, what Delta Garments owns that will soon turn into cash is higher, and its own cash on hand is lower, than its finished profit figure would suggest.
A common mistake is assuming a factory with a full order book and profitable pricing must have healthy cash. Profit is only realised once an order is finished and paid; until then, its full value sits as cash tied up, not cash in hand. A factory that wins three profitable orders at once, each needing its own fabric purchase and labour cost paid up front, can find itself needing far more cash at one time than it holds, even though every order will eventually turn a profit. Growth makes this trap worse, not better: a factory that doubles its order book without changing its payment terms or its own supplier credit roughly doubles the cash it must find at the same time, long before any of that growth shows up as extra profit in the bank. What this costs a factory that gets it wrong is real: an unplanned cash shortage can force it to delay paying its own suppliers, borrow at short notice, or turn down a new order it could otherwise have made money on, precisely at the moment its business looks most successful on paper.
A factory's profit and its cash are not the same thing. Profit is what is left over once an order is fully finished and paid. Working capital is the cash a factory must hold, or borrow, while an order is still moving through production and waiting to be paid. Fabric bought, garments made, and invoices sent but not yet paid all count as cash tied up, even though none of it is profit yet. A factory that takes on more orders at once needs more of this tied-up cash at the same time, not less, even if every order is separately profitable. A full order book is good news for future profit. It is not proof that a factory's cash position is healthy right now.
Delta Garments has just confirmed two new export orders of similar size to Order A, on top of the order already in production. Karim, the production manager, reports this to the owner as good news. The owner reads the report and tells the finance clerk there is no need to check the bank balance this month, since three profitable orders are now confirmed.
Here is the note Karim actually wrote:
Is the owner right that a full, profitable order book means the factory's cash position needs no further check? Decide before opening the answer.
No. Two facts in Karim's own report decide this together.
First, the size of the cash tied up. About USD 144,000 of order value is now in progress at once, most of it not yet spent on fabric and labour that must still be paid for. That is more than 12 times the USD 11,700 of profit the three orders will eventually earn.
Second, what the report does not say. Karim's report never states how much cash Delta Garments currently holds or can borrow. Without that number, nobody can tell whether USD 144,000 of cash tied up at once is comfortably affordable or a serious risk.
The owner's instinct that three profitable orders is good news is correct. But good news about future profit is not the same question as whether the factory can fund USD 144,000 of cash tied up right now. The finance clerk should still check the bank balance before assuming the cash position is safe.
Using Order A's own figures scaled to three orders in progress at once, as in Karim's report:
For every dollar of eventual profit, Delta Garments must fund about USD 12.30 of cash tied up while the orders are in progress. If the factory cannot fund or borrow that amount, it may have to delay paying Nile Spinning or Colorline Dyeing for fabric already delivered, which risks losing supplier trust on the very next order, a cost that does not show up on any single order's own costing sheet.
Open the course workbook's "Working capital" sheet. It lists current assets (inventory, unpaid customer invoices) and current liabilities (unpaid supplier invoices, short-term loans) as separate rows, and calculates working capital as their difference with a live formula. For Order A, enter the order value as inventory or receivable, depending on its stage, and leave the profit figure out of this sheet entirely; profit belongs on the costing sheet, not on the working capital sheet.
[Download the Working capital and cash cycle sheet](../../templates/T15-C04-working-capital-and-cash-cycle-sheet.xlsx)
1. What is working capital?
2. Why can a factory with a full, profitable order book still run short of cash?
3. A factory takes on two new orders of USD 30,000 each at the same time, each earning USD 2,000 profit. What happens to its working capital need compared with running one such order at a time?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Working capital | رأس المال العامل | Fonds de roulement | İşletme sermayesi | The money a business needs on hand to keep operating while it waits to be paid for goods already made. |
| Cash flow | التدفق النقدي | Trésorerie | Nakit akışı | The movement of money into and out of a business over time, separate from how much an order is worth on paper. |
| Cash-flow gap | فجوة التدفق النقدي | Écart de trésorerie | Nakit akışı açığı | The length of time between a factory finishing production and actually receiving payment for that production. |
| Profit | الربح | Profit | Kâr | The money left over after all costs are paid, out of a selling price. |
| Letter of credit | اعتماد مستندي | Lettre de crédit | Akreditif | A bank promise to pay the factory once the shipping documents match the order. |
| Open account | حساب مفتوح | Compte ouvert | Açık hesap | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
You now know why working capital and profit are different amounts. The next lesson breaks the wait for cash into three named parts and shows you how to calculate the total number of days a factory's cash stays tied up. Back to the course map