Why Profitable Manufacturers Run Out of Cash

How a record year on paper can leave a growing manufacturer scrambling for cash, and how to close the gap without slowing down.

By Charles M. Barr, CEO, LVRG Business Funding

The Best Year on Paper

The call from the CPA is usually good news.

Sales are up. Margins held. The company just had the best year in its history, and the profit and loss statement proves it. There’s even a tax bill on the way to show for it.

That same week, the owner is moving money around to cover Friday’s payroll. The line of credit has been maxed out for a month. A steel order is waiting on a payment, and the biggest customer just paid an invoice from two months ago.

If you run a growing manufacturing company, you’ve probably lived some version of that week. And you’ve probably asked the question every owner in that seat eventually asks: if we’re this profitable, where’s the cash?

The answer isn’t that something is wrong with the business. It’s that profit and cash are two different things, and in manufacturing they can be months apart.

Profit and Cash Keep Different Scoreboards

Your profit and loss statement measures whether the work made money. It counts a sale when you invoice it and a cost when you incur it.

Your bank account measures something else entirely: when the money actually moves.

In some businesses, those two scoreboards stay close together. In manufacturing, they rarely do. You buy the steel, the resin or the components first. You pay the people running the machines every week. You carry the material on the floor while the job works its way through production. Then you ship, invoice and wait for the customer to pay. The profit is real. It just hasn’t arrived yet.

The time between money going out and money coming back is where profitable companies run short.

The Cash Gap

There’s a simple way to measure that time. Call it the cash gap.

Take the number of days it takes your customers to pay you. Add the number of days material sits in your facility as inventory and work in process. Then subtract the number of days you take to pay your suppliers.

What’s left is how long every dollar you spend is out of your hands before it comes back. Finance people call it the cash conversion cycle. Owners just feel it, usually the night before payroll.

Michigan manufacturers tend to carry wider gaps than most. Many customers pay in 60 or 90 days. Tooling often has to be built and paid for long before the customer pays for it. And input costs have climbed. As of September 2026, our Michigan Commercial Lending Report found hot-rolled steel selling for more than a third above where it was a year earlier. The same tonnage now ties up more cash on the shelf, in work in process and in receivables.

What the Gap Looks Like in Real Numbers

Here’s an illustrative example in round numbers.

Take a $15 million manufacturer. Customers pay in 60 days. Material runs about 40% of sales and sits on the floor for about 45 days between the receiving dock and the shipping dock. Suppliers get paid in 30 days.

At any given time, that company has roughly $2.5 million sitting in receivables and about $740,000 tied up in material and work in process. Its suppliers are effectively carrying about $490,000 of that until it pays them.

Net it out, and about $2.7 million of the company’s money is sitting in the gap.

Now give that company a great year. Sales grow 30%, to $19.5 million. Nothing else changes: same customers, same terms, same suppliers. The gap grows to about $3.5 million.

That’s roughly $800,000 more cash tied up in the business, before it buys a single new machine or hires one more operator. The profit from that growth is real, but for months it shows up as receivables and material on the floor, not money in the bank.

That’s why growing manufacturers so often feel tightest on cash in their best years.

Growing and already feeling the squeeze? Call LVRG at (855) 998-5874.

Three More Places Cash Disappears That Your P&L Doesn’t Show

The cash gap is the biggest drain, but it isn’t the only one. Three other big uses of cash barely show up on the profit and loss statement at all.

Loan principal. Your P&L shows the interest on your loans, not the principal. A company can report a healthy profit and still send a large share of its cash to the bank in principal payments.

Equipment bought with cash. A $600,000 machine shows up on the P&L a little at a time through depreciation. The cash left the bank account the day you bought it.

Taxes and distributions. Taxes can come due on profit that’s still sitting in receivables, and owner distributions come out of the same cash.

Add those to the cash gap, and it’s easy to see how a company can earn more than ever and still feel broke.

Growth Makes the Gap Bigger. That’s Not a Reason to Stop.

Every new order widens the cash gap before it pays off. More work means more material, more payroll and more receivables, all before the first new dollar comes back.

Some owners respond by slowing down. They turn away work, delay the machine and put off the bigger building. It feels safe, but it isn’t. A manufacturer that stops growing doesn’t stand still for long. Customers find other suppliers, competitors take the work, equipment gets older, and good people leave for companies that are going somewhere.

The answer isn’t less growth. It’s financing that grows with you.

How to Close the Gap

There are two sides to closing a cash gap, and the best results come from working both.

Start with operations. Invoice the day the parts ship, not at the end of the month. Follow up with slow payers before they become 90-day payers. Ask your key suppliers for longer terms, especially as your volume with them grows. Watch for material that sits too long. Each of these narrows the gap a few days at a time, and every day you take out frees up cash.

Then match the financing to the gap. This is where most manufacturers have more options than they realize. A standard bank line, sized once a year off last year’s numbers, rarely keeps up with a growing gap, something we covered in Stop Chasing the Wrong Bank for the Wrong Loan.

An asset-based line of credit is built for exactly this problem. It’s backed by your receivables and inventory, so as you invoice more and carry more material, the amount you can borrow grows with them, within the line’s committed limit. The same work that widens your cash gap expands the line that covers it, and you only pay interest on what you actually draw.

Your equipment can do more than run parts. Machines you already own can add borrowing capacity, either as part of an asset-based line or as a separate term loan, instead of sitting on the balance sheet doing nothing for your cash position.

New equipment should usually be financed, not paid for in cash. Paying cash for a machine that will run for 15 years drains working capital today to fund a decade of production. Financing it spreads the cost over the years the machine earns its keep.

And if you own your building, the equity in it can be put to work, freeing cash to fund growth or pay off higher-cost debt.

The trade-off with an asset-based line is reporting. Because the line moves with your receivables and inventory, the lender needs to see them regularly, through borrowing base reports and periodic field exams. For a manufacturer whose biggest problem is cash tied up in receivables and material, that’s a small price for a line that keeps pace with the work.

Calculate Your Own Cash Gap

You can estimate your cash gap in a few minutes with three numbers from your books.

First, the average number of days it takes your customers to pay you. Second, the number of days of material and work in process you typically have on hand. Third, the average number of days you take to pay your suppliers.

Add the first two and subtract the third. That’s your cash gap in days.

Here’s why every day matters. Each day you shorten the time customers take to pay frees up about one day of sales in cash. For a $15 million manufacturer, that’s roughly $41,000 for every single day.

If your gap is getting wider every year, or your sales are growing faster than your line of credit, it’s time to rethink how your financing is built. Run those three numbers, then call us at (855) 998-5874. We’ll show you what your gap is costing you and how to finance it.

Real Michigan Closings That Solved This Problem

The same pattern shows up across our recent closings.

A metal fabricator in Grand Rapids: a $4.8 million working capital line to finance raw steel inventory and support operating cash flow.

An automotive supplier in Utica: a $6.25 million asset-based line to finance inventory and receivables growth.

A tooling and stamping manufacturer in Roseville: a commercial real estate loan for its property, plus a $500,000 line for coil inventory and material costs.

An injection molder in Midland: a $2.25 million line to support resin purchases and operating cash flow.

Different trades, different towns, same problem: profitable companies with cash tied up in material and receivables. You’ll find more on our Deal Closings page.

Profit Says You’re Doing the Work Right. Cash Lets You Do More of It.

Running short on cash while making a profit isn’t a contradiction. It’s what growth looks like in manufacturing. The companies that keep growing aren’t the ones that never feel the squeeze. They’re the ones whose financing was built for it.

That’s the work we do at LVRG. We sit down with owners, look at how cash actually moves through the business, and structure financing around the gap. That might be a line backed by receivables, inventory and equipment, the equity in a building, or a combination built for where the company is going. A straightforward working capital line can close in as little as two to three weeks.

If your best year on paper felt like your tightest year in the bank, let’s talk before the gap starts making your decisions for you.

LVRG Business Funding provides business loans, working capital lines of credit, asset-based lending and owner-occupied commercial real estate financing from $500,000 to $15 million for Michigan manufacturers and lower middle market companies, with a deep concentration in Macomb County, Oakland County and metro Detroit.

Call (855) 998-5874 or start the conversation.

Frequently Asked Questions

Why is my business profitable but always short on cash?

Because profit is counted when you invoice, and cash arrives when customers pay. In manufacturing, material, payroll and receivables tie up cash for weeks or months in between. Loan principal and equipment purchases also drain cash without showing up as expenses on the profit and loss statement.

What is the cash conversion cycle?

It’s the number of days between paying for material and collecting from your customers: days to collect receivables, plus days of inventory and work in process, minus days you take to pay suppliers. The longer the cycle, the more cash a business needs to operate.

How much working capital does a growing manufacturer need?

Enough to carry its cash gap at its new size. In the example above, a $15 million manufacturer growing 30% needs roughly $800,000 in additional working capital just to support the growth.

Can growth cause cash flow problems?

Yes. Growth widens the cash gap before it pays off, because material, payroll and receivables grow ahead of collections. That’s why financing that grows with sales, like an asset-based line, works so well for growing manufacturers.

Should I pay cash for equipment or finance it?

For long-lived equipment, financing usually makes more sense. Paying cash drains working capital today for a machine that will produce for years, while financing spreads the cost over the life of the asset.

How does a line of credit help with customers who pay in 60 or 90 days?

A line of credit covers payroll, material and overhead while you wait to get paid, then gets paid down as customers pay. An asset-based line backed by receivables can grow as your billing grows.

About the Author

Charles M. Barr is the CEO of LVRG Business Funding, a metro Detroit-based direct lender and capital advisor. He works with Michigan manufacturers and lower middle market companies to structure financing around how their businesses actually run and grow.