Why Founders Underestimate Working Capital

Your P&L can show profit while your business is running out of cash. This is not a paradox — it’s arithmetic. The fashion industry produced $140 billion in unsold stock in 2023. Most of it was funded before demand was confirmed.

Ask most consumer brand founders about their financial position and they will describe it in terms of revenue and margin. Ask about cash and the answer is typically more approximate — a sense of the bank balance, a vague awareness of upcoming payables, a belief that if sales stay strong, liquidity will follow. This is not a knowledge gap. It is a framing problem, and it is one of the most common causes of financial distress in otherwise viable businesses.

The working capital requirement in a consumer brand is structural, not incidental. It is a direct function of how the business model works: product must be designed, produced, and committed to inventory months before it can be sold. That gap — between the moment cash leaves the business to fund production and the moment revenue arrives from sales — is the cash conversion cycle, and in fashion and lifestyle categories, it is rarely shorter than 90 days and frequently exceeds 120. For luxury and premium brands specifically, extended production timelines, artisan sourcing, and smaller batch runs can push this figure even higher.

The maths are straightforward but the implications are routinely underappreciated. A brand doing $2M in annual revenue with a 120-day cash conversion cycle has, at any given time, roughly $650,000 tied up in the operating cycle. That capital is not available for anything else. It is not in the bank. It is in transit between a factory in Portugal and a warehouse in Sydney. It is in finished goods waiting for a wholesale delivery window. It is in receivables owed by retailers on 60-day terms.

The sector-level data: In 2023, the global fashion industry produced an estimated 2.5 to 5 billion surplus units — stock worth up to $140 billion that sat unsold. This is not primarily a demand failure. It is a working capital failure: inventory committed at scale before demand was validated, funded with capital that had no plan for the overhang it was creating.

Case: Ted Baker. In the 11 months preceding its 2024 bankruptcy filing, Ted Baker reported a net loss of $11.3 million and negative operating cash flow exceeding $5 million. A business that had built genuine brand equity over decades found that brand recognition could not compensate for a cash position that had deteriorated below the minimum needed to operate. The crisis was not sudden — it was the accumulated consequence of a working capital position that had been underfunded relative to the complexity of the operating model.

Case: Saks Global. In January 2026, Saks Global — parent company of Saks Fifth Avenue and Neiman Marcus — filed for Chapter 11 after a highly leveraged $2.7 billion acquisition of Neiman Marcus left the combined entity unable to meet its near-term cash obligations. The business had $1 to $10 billion in both assets and liabilities. The question was never solvency on paper. It was liquidity in practice: whether cash would arrive before obligations came due. The working capital structure of a luxury retail operation, dependent on inventory funded months in advance and collected from wholesale accounts on extended terms, made this a foreseeable problem from the moment the leverage was applied.

What makes this particularly counterintuitive is that growth makes it worse, not better. A brand that doubles revenue in a year doubles its working capital requirement at the same rate. If the cash to fund that expansion isn’t in place before the growth happens — through equity, debt, or supplier terms — the business will run out of liquidity at precisely the moment when the top line looks most encouraging. This is the dynamic that catches founders off guard. The business is ‘doing well’ by every narrative metric while the bank account is declining.

The wholesale channel amplifies the problem considerably. When a brand sells through retail accounts on net-30 or net-60 terms, the cash conversion cycle extends beyond the production window into the collection window. The product ships, the invoice is issued, and the cash arrives weeks or months later — during which time the supplier for the next season may already be expecting payment. The timing mismatch is not a minor inconvenience. It is a structural feature of the business model that must be funded.

The root cause of the underestimation is that founders are trained to think in P&L terms. Revenue, cost of goods, gross margin, operating expenses, net profit — this is the scorecard by which consumer businesses are most commonly evaluated, and it is genuinely useful. But the P&L does not tell you when cash moves. It does not show you that the gross margin you earned in March required cash you spent in October. The cash flow statement does, and it is the document that most consumer brand founders look at least often.

The corrective discipline is to model the cash flow position as rigorously as the P&L — ideally on a rolling 13-week basis, mapped against all known and anticipated outflows. McKinsey’s analysis of apparel and fashion company IPOs since 2018 found that newly listed AF&L stocks fell an average of 40 percent in the year after listing — a figure that, in many cases, reflects the moment when the working capital reality of a scaling consumer business becomes visible to investors who were previously evaluating it on revenue trajectory alone. J.P. Morgan’s working capital research consistently finds that businesses operating with formal cash flow forecasting carry materially less short-term debt and experience fewer liquidity crises than those relying on P&L-based projections alone.

The point is not to eliminate the working capital requirement, which is not possible, but to see it clearly enough to plan for it. A business that understands its cash conversion cycle can raise appropriate financing, negotiate supplier terms, and time its growth investments intelligently. A business that doesn’t is perpetually surprised by a problem that was always predictable.