Why Profitable Businesses Still Fail, Poor Working Capital Explained

Introduction - Poor Working Capital Explained

For construction and engineering SMEs, survival often depends on cash, not profit. A company can show healthy margins on paper yet still fail because of poor working capital management.

Working capital is the money tied up in day-to-day operations: what’s owed to you, what you owe, and what you’re holding in materials or stock.

Many directors misunderstand it. They chase turnover, celebrate new projects, and believe profit will solve all problems. But here’s the truth: poor working capital doesn’t announce itself loudly. It creeps in quietly. A late stage payment here, a retention stuck for 6 months there, suppliers demanding quicker payment, it slowly squeezes liquidity until the business can’t breathe.

This matters because too many construction and engineering firms collapse despite being profitable. They miss opportunities because they can’t fund new projects. They damage relationships with suppliers because they constantly delay payments. And they lose credibility with lenders because forecasts don’t match reality.

At Jones Financial Accounts (JFA), we’ve seen the pattern repeat. Working capital isn’t a “finance department issue”, it’s a survival issue. In this blog, we’ll break down what poor working capital management looks like, why it kills businesses quietly, and, most importantly, how to avoid it before it’s too late.

What Is Working capital

Working capital is the balance between short-term assets and liabilities. Assets include cash in the bank, invoices owed to you, and stock or materials. Liabilities include what you owe suppliers, HMRC, lenders, and payroll.

When managed well, working capital acts as a safety cushion. It keeps projects funded, payroll smooth, and suppliers confident. But when it’s neglected, it silently undermines a business.

Here’s how poor working capital management shows up in construction and engineering SMEs:

• Slow receivables: Clients take 60–90 days to pay invoices, yet wages and material costs demand cash weekly. The mismatch drains liquidity.

  
  

• Aggressive payables: Suppliers want money upfront, often before you’ve been paid. This ties up cash before income arrives.

  
  

• Excess stock or over-ordering: Materials are bought months ahead, locking up cash that could fund other projects.

  
  

• Ignored retentions: Retentions held back for 6–12 months are excluded from forecasts, leaving directors unprepared for the shortfall.

  
  

The danger is that directors only look at profit and loss statements. A job may appear profitable, but if cash is tied up in debtors or stock, the company still runs dry. That’s why working capital is a more accurate measure of short-term survival than profit.

Strategy to Get It Right

Fixing working capital starts with visibility. You can’t manage what you can’t see. Here’s a step-by-step strategy:

1. Build a rolling 13-week cashflow forecast. Update it weekly. This shows when gaps are coming and allows you to act before cash runs out.

   
   

2. Tighten debtor control. Issue invoices immediately, chase payments as soon as they’re overdue, and set clear credit terms. Don’t allow “friendly” clients to drag you into 90-day debt.

   
   

3. Negotiate supplier terms. Where possible, align supplier payments with client stage payments. Even extending terms from 30 to 45 days can ease cash strain.

   
   

4. Manage stock and materials smarter. Order in line with project progress instead of buying all upfront. This keeps more cash available.

   
   

5. Factor in retentions. Always include them in forecasts. Assume they’ll take longer to recover than agreed, this protects your planning.

   
   

6. Monitor KPIs monthly. Track debtor days, creditor days, and stock days. Rising numbers signal pressure on cash.

   
   

This approach doesn’t eliminate all risks, but it gives directors control. Instead of being blindsided by shortages, you’ll anticipate them and plan funding or supplier discussions well in advance.

Example

A £1m-turnover engineering firm doubled its live projects from three to six. On paper, profits grew. In reality, receivables stretched to 75 days while supplier costs landed within 30.

Within two months, the company’s cash balance fell by £150k, despite profits showing positive.

By implementing weekly forecasts, negotiating 45-day supplier terms, and chasing overdue invoices earlier, the firm restored £100k of liquidity and avoided taking on costly emergency loans.

Misconceptions

• “Profit equals cash.” Wrong, cash can be tied up in unpaid invoices or materials.

• “Growth solves cash problems.” Growth magnifies cash gaps; bigger contracts mean bigger outflows before income arrives.

• “Banks will always cover shortfalls.” Without forecasts and discipline, banks see you as risky and may refuse support.

Key Takeaways

• Poor working capital quietly kills SMEs, even profitable ones.

• The problem isn’t profit, it’s the timing mismatch between inflows and outflows.

• Forecasting, credit control, and supplier negotiation are the key tools to protect liquidity.

• Growth without working capital planning increases financial pressure, not relief.

If your business feels constantly busy but cash is always tight, it’s time to review your working capital strategy. At JFA, we help construction and engineering SMEs protect cash, build supplier trust, and grow sustainably.

Wrapping up today's insights, tomorrow we simplify another accounting challenge.