Remember when your finance professor droned on about working capital? Well, turns out they were onto something big. We've spent seven years tracking a fascinating pattern: companies that master working capital yield aren't just surviving – they're turning every dollar into a money-printing machine. Some are hitting 140% returns. Yes, you read that right.

This Week On Practical Nerds - tl;dr

Working capital is your supply chain fuel receivables minus payables plus inventory

High contribution margins alone won't cut it track your yield on working capital

Smart companies generate 25% annual returns on working capital deployment

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Working Capital Is Your Supply Chain Fuel: Receivables Minus Payables Plus Inventory

What Actually Makes Up Your Working Capital Position?

The tech world loves to hate on working capital. "It's bad," they say. "Avoid it at all costs." But that's missing the forest for the trees. Working capital isn't just a number on your balance sheet – it's the fuel that powers your supply chain.

Let's break it down to first principles. Working capital is simply receivables minus payables plus inventory. In plain English: what customers owe you, minus what you owe suppliers, plus the value of goods sitting in your warehouse. It's the capital you inject into your supply chain to keep the engine running.

But here's where it gets interesting. Working capital isn't just about having cash tied up in operations. It's about how effectively you use that cash to generate returns. Think of it as deploying capital temporarily to produce revenue. And just like any investment, the key metric isn't the absolute amount – it's the yield.

The real breakthrough comes when you understand working capital days. If you're a $1 million per month business with $1 million in working capital, that represents 30 days of sales. This metric tells you how long your capital is tied up in the business cycle. The shorter the cycle, the more times you can redeploy that capital each year.

Key Insight: Working capital isn't inherently good or bad – it's a tool. Like any tool, its value depends on how skillfully you use it to generate returns.

High Contribution Margins Alone Won't Cut It: Track Your Yield on Working Capital

How Do You Calculate The True Return On Your Working Capital?

We've developed a formula that's become our north star for evaluating working capital efficiency: Contribution Margin / Working Capital (annualized). This isn't some theoretical academic exercise – it's battle-tested across dozens of companies over seven years.

The beauty of this metric is that it captures the complete picture. Contribution margin includes all transactional costs: cost of goods sold, logistics, marketing, sales, and even financing costs. When you divide this by your working capital and annualize it, you get a powerful benchmark that works across different business models.

Here's what we've learned: The sweet spot is companies generating a 25% or higher annual yield on their working capital. That means for every $100 of working capital deployed, they're generating $25 or more in contribution margin. For context, that's better than most hedge funds and significantly above market returns.

But it gets even more interesting when you lever it up. If you can borrow at 15% and generate a 25% yield, that 10% spread flows straight to equity holders. On $10 million of working capital, that's an extra million dollars of profit – pure financial engineering magic.

Key Insight: Your working capital yield is the true measure of capital efficiency. High margins mean nothing if your capital is trapped in long cycles with low returns.

Smart Companies Generate 25% Annual Returns On Working Capital Deployment

What Does Excellence In Working Capital Look Like?

We've benchmarked three main types of businesses: managed marketplaces, outcome-as-service companies, and fintechs. The results are eye-opening.

The best fintech players consistently generate 25% yields on their working capital. Some early-stage companies even hit 140% yields by cherry-picking the best customers and segments. While that's not sustainable at scale, it shows what's possible with disciplined capital allocation.

In managed marketplaces, we see two winning models:

• High margin (20%) with longer cycles (60-70 days)
• Lower margin (3-5%) but ultra-fast cycles (10-15 days)

The most sophisticated players run multiple business lines with different working capital profiles. We tracked one marketplace doing $200-700M in GMV with two distinct segments:

• Segment A: 30 day cycles generating 19% yield
• Segment B: 2 day cycles generating 57% yield

The key is understanding these aren't competing strategies – they're complementary tools in your working capital arsenal. The best companies think like banks, carefully allocating capital across opportunities to maximize overall returns.

Key Insight: Excellence isn't about minimizing working capital – it's about optimizing its deployment to generate the highest risk-adjusted returns.

Conclusion: The Working Capital Yield Framework

Capital allocation is an art and a science. Start with understanding your working capital position and cycle times. Calculate your yield using contribution margin divided by working capital, annualized. Benchmark against the 25% target. Then optimize by:

• Segmenting your business lines by working capital profile
• Understanding which segments can absorb more capital profitably
• Using debt strategically to enhance equity returns
• Treating working capital as an investment portfolio

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‍Companies Mentioned

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Floating Point: https://floating.vc/
Revolut: https://www.revolut.com/

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