Working Capital Is the Real Constraint In Distribution

Several owners have told me the same thing in different words. Sales are fine. Demand is fine. The team is working hard. Then cash gets tight anyway.

That is not a character flaw. It is the business model showing its teeth.

Distribution turns money into inventory, inventory into receivables, and receivables back into money. When that loop stretches, growth can feel like progress while the bank balance moves the other direction. That loop has a name. The cash conversion cycle. It is the time between paying for inventory and collecting cash from customers.

Working capital pressure usually shows up in three places.

Inventory sits longer than expected.

Customers pay slower than expected.

Suppliers require cash faster than expected.

Each one is manageable in isolation. The problem is when two or three move against you at the same time.

Inventory is not just stock, it is a financing decision

In a distribution business, inventory is often the largest use of cash. Owners talk about service levels and fill rates, but the balance sheet hears something else. Every extra day inventory sits is cash tied up. Days inventory outstanding is a common way to measure that, expressed as how many days of cost of goods sold are sitting on the shelf.

The trap is that inventory bloat rarely looks dramatic in the moment. It looks like reasonable stocking decisions, made one purchase order at a time.

A few forces make it worse.

Vendor minimums and price breaks can push buys that look smart on a unit cost basis but weak on cash.

Slow moving items accumulate quietly because nobody wants to be the person who causes a stockout.

Lead times and supply volatility encourage safety stock, even when demand is stable.

Many owners intuitively understand this, but intuition alone does not tell you which items are consuming the most cash relative to their contribution. The discipline is in separating availability from accumulation. Not everything that sells should be stocked deeply. Not everything that is stocked deserves the same reorder logic.

Receivables are a promise until they become cash

A distribution business can ship a record month and still feel broke if customers take longer to pay. Days sales outstanding is the metric that captures the lag between invoicing and collection. In the cash conversion cycle, that lag is one of the main levers.

Several owners have described a familiar pattern. A few large accounts set the tone for terms. The sales team does not want to push back. The accounting team follows up, but disputes and short pays stretch timelines. Meanwhile payroll and vendors do not wait.

This is where working capital becomes cultural. If sales treats terms as a negotiating chip to close business, finance will spend the year funding that choice. If service tolerates vague proof of delivery processes, collections will stay reactive. If credit limits exist but are not enforced, aging becomes a suggestion.

None of that requires a harsh posture toward customers. It requires clarity and consistency. Most good customers respect consistency. What they exploit is inconsistency.

Payables can help, until they hurt

Owners often look to payables when cash tightens. Days payables outstanding reflects how long you take to pay suppliers. In the cash conversion cycle, longer payables can shorten the net cash gap.

But distribution is not a software business. Vendors are not interchangeable. Many categories depend on relationship, allocation, and credibility.

Stretching payables can buy time, but it can also raise costs in ways that do not show up as a line item called consequence. You lose early pay discounts. You lose priority on backordered items. You lose flexibility when a customer need is urgent. In some cases, you lose the vendor altogether.

This is where a clean mental model helps. Payables are a lever, not a strategy. Use them intentionally, not automatically.

The math is simple, the operations are not

The cash conversion cycle is often described as days inventory outstanding plus days sales outstanding minus days payables outstanding.

That formula is straightforward. The difficulty is that each input is controlled by many small operational decisions.

Purchasing decisions decide inventory days.

Sales and service decisions decide receivable days.

Vendor management decisions decide payable days.

The owners who manage working capital well tend to do a few things consistently.

They treat inventory like a portfolio, not a warehouse.

They define terms and credit as part of the customer relationship, not an afterthought.

They protect vendor trust, even when they negotiate firmly.

Working capital management is not glamorous. It is also not optional. In distribution, it often matters more than the income statement in the short run. Banks lend against it. Vendors watch it. Customers feel it in fill rates and responsiveness.

Where this breaks

There are moments when textbook working capital advice fails.

If you serve emergency driven customers, you may need inventory depth that looks inefficient on paper.

If your vendors are unstable, paying faster can be worth it to secure supply.

If your category is seasonal, the balance sheet will swell before it improves.

Those realities do not invalidate the discipline. They raise the bar for being deliberate. The goal is not to minimize working capital. The goal is to fund the right service promise without letting cash leakage become normal.

In my experience, the healthiest distribution businesses do not talk about working capital as a finance topic. They treat it as an operating system. The cash tells you where the business is out of alignment.