Working capital for a manufacturing company is the cash it needs to pay for materials, labour and the factory while each order is being made, before the customer pays. Margin needs the same care: a 50% markup on cost is only a 33% margin on the selling price.
The founder came to us with a good business. The company makes fabric from bamboo and sells it in three ways: straight to shoppers, as workwear, and to the medical trade. Orders were already coming in. What it needed was a model and a deck that would hold up when an investor started asking questions.
We started where we always start. We read every number the founder had and asked where it came from. Two of them didn't hold up.
The first mistake: markup vs margin
The plan said the company made a 50% margin. It didn't. It added 50% on top of its cost. That's a markup, and it's a different number.
Here's the simple version. If a roll of fabric costs $100 to make and you sell it for $150, you've added 50%. But your margin is the profit as a share of the price you sell for. That's $50 out of $150, which is 33%.
Mixing the two up is common. It's also the kind of thing an investor spots in about a minute. Once they find one number that's wrong, they start doubting the rest. So we fixed it before anyone else saw it, and every profit line in the model moved.
The second mistake: the working capital gap nobody modelled
Making fabric takes about eight weeks from order to finished product. During those eight weeks the company pays for materials, labour and the factory. The customer pays at the end.
The founder's plan put the money in the bank when the order came in. Real life puts it there two months later. When sales grow, that gap grows with them. A company can be profitable on paper and still run out of cash, because it's always paying for orders it hasn't been paid for yet.
We built the production cycle into the model. Each month shows what the company spends to make the next batch and when the money for it actually arrives. That one change showed how much working capital the business really needed. The number was bigger than the plan said.
What we built
- A 15-tab production model, with each of the three product lines on its own order cycle
- A working capital view that shows cash out and cash in, month by month
- Sales that start from confirmed orders only, so month one is a fact and not a hope
- A raise in stages, so the company asks for money when it needs it instead of all at once
- A pitch deck that tells the story the model now supports
Why it matters for your raise
Neither mistake was a sign of a bad business. They were signs of a founder who knows how to make fabric and hadn't yet had to explain it to an investor. That's normal. It's also why the model has to be right before the deck goes out.
An investor who finds a markup sold as a margin will ask what else is wrong. An investor who sees the cash gap already worked out will ask how soon they can meet you.
If you make something, check two numbers before you raise: your margin on the selling price, and the cash you need while each order is being made.
Questions founders ask
What is the difference between markup and margin?
Markup is profit as a share of cost. Margin is profit as a share of the selling price. If a roll of fabric costs $100 to make and sells for $150, the $50 profit is a 50% markup but only a 33% margin. Investors read margin, so a plan that calls a markup a margin overstates every profit line in the model, and an investor will spot it fast.
How do you calculate working capital for a manufacturing company?
Work out how long cash is tied up in each order. Add the days from order to finished product and the days customers take to pay, then take away the days you take to pay suppliers. That's your cash conversion cycle. Multiply your daily production cost by those days to see the cash you have to carry. Show it month by month, because the gap grows as sales grow.
Why is margin always lower than markup?
Both use the same profit. Margin divides it by the selling price, and markup divides it by the cost. When you sell at a profit, the price is always bigger than the cost, so margin always comes out smaller. A 100% markup is a 50% margin, and a 25% markup is a 20% margin. Check which one your plan uses before an investor does.