# Working capital: who pays whom first > Prepayments, payouts and invoices: the cash conversion cycle, working capital on one date, when negative working capital funds growth and why other lines eat cash. - Course: [Finance for Product People: From Unit Economics to Business Cases](https://productovi.com/courses/finance-for-product.md) - Module: How much cash does growth need? - Lesson 13/32, ~27 min - Source: https://productovi.com/courses/finance-for-product/working-capital ## The working capital cycle: who pays whom first **Alex Tutor:** Back at Klasna's product team: Leo wants to grow Teams, the line that sells lessons to companies. **Leo:** Teams is our best line: 339 UAH of gross profit per lesson, more than double a 1:1 lesson. I want to sell much more of it. Why is Hanna nervous? **Hanna:** Because of the calendar. With families we get the money first and pay tutors later. With companies it's the other way round. **Alex Tutor:** Let's put days on it. The **cash conversion cycle**, or working capital cycle, is the number of days between paying for what you deliver and getting paid for it. Negative means customers pay you before you pay for the work. > **Two timelines, on average** > > | | 16-lesson package | Teams quarter, 60-day terms | > |---|---|---| > | Customer pays | day 0 | invoice on day 90, paid on day 150 | > | Lessons take place | days 1–70, on average day 35 | days 1–90, on average day 45 | > | Tutor is paid | about 10 days after the lesson: day 45 | about 10 days after the lesson: day 55 | > | Cash conversion cycle | 0 − 45 = **−45 days** | **?** | > > Tutors are paid twice a month, so a payout comes on average about 10 days after the lesson. > **Exercise:** Use the two timelines. A Teams quarter is invoiced on day 90 and paid 60 days later; the tutor for the average lesson is paid on day 55. What is the **cash conversion cycle** of a Teams quarter, in days? **Alex Tutor:** Now change one thing in the package timeline and see how the cycle moves. > **Exercise:** Klasna considers paying tutors weekly, so a payout would come on average 4 days after the lesson instead of 10. A family still pays for a 16-lesson package on day 0, and its lessons take place on average on day 35. What would the package's **cash conversion cycle** be, in days? ## Working capital on one date **Sofia:** Days are clear. How much money does that add up to for the whole company? **Alex Tutor:** That's **working capital**: money tied up in day-to-day operations. What customers owe you, the **receivables**, minus what you owe suppliers and tutors, the **payables**, minus what customers prepaid, the deferred revenue. **Sofia:** Why subtract deferred revenue? It isn't a bill anyone will send us. **Alex Tutor:** It's still an obligation: we owe those lessons. Until they're taught, that money in the bank isn't really free. Our post on [working capital and DSO](/blog/working-capital-and-dso) has the general formula. **Hanna:** Here's ours at the end of November, right after the autumn quarter. > **Klasna's working capital items, 30 November 2026** > > | Item | UAH | > |---|---| > | Teams invoice, not yet paid (receivable) | 640,000 | > | Tutor payouts for 16–30 November, due 5 December (payable) | 1,918,370 | > | November video, AI and Club hosts, paid in December (payable) | 375,930 | > | Prepaid lessons not yet taken (deferred revenue) | 6,180,000 | > | Club annual plans, months still owed (deferred revenue) | 343,800 | > > Working capital = receivables − payables − deferred revenue. > **Exercise:** Use the list of Klasna's items on 30 November 2026. Working capital = receivables − payables − deferred revenue. What is Klasna's **working capital** on that date? **Alex Tutor:** Before we read the sign, make sure each part of the formula is clear. > **Exercise:** Match each working capital item to what it means at Klasna. ## Negative working capital: when it is good **Sofia:** Minus eight million? That sounds like a company in trouble. **Alex Tutor:** For cash it's the opposite. **Negative working capital** means customers and suppliers fund your operations. Here families and tutors lend Klasna 8.2 million, interest-free, for as long as the business keeps running. When package sales grow, that pool grows and releases even more cash. **Hanna:** And it shrinks when sales slow down, as every summer shows. Negative working capital is a loan you repay whenever families buy less. > **Exercise:** **True or false:** Klasna's working capital of −8,178,100 UAH means it owes more than it can pay and is in financial trouble. **Hanna:** Here's the question I ask every June. > **Exercise:** Summer comes and families buy far fewer prepaid packages than in spring, while lessons already bought keep running. What happens to Klasna's cash? ## Growth that ties up cash **Leo:** So where does Teams come in? **Alex Tutor:** Teams works with positive working capital. On the last day of a quarter, the whole quarter's invoice sits in receivables, and the tutors for it are mostly paid already. Every extra hryvnia of Teams per quarter is an extra hryvnia waiting to be collected. **Sofia:** And the bigger the quarter, the bigger the hole at its end. **Hanna:** Your sales plan has Teams growing from 640,000 a quarter to 1,600,000. > **Exercise:** Teams is invoiced on the last day of each quarter and paid 60 days later. If Teams grows from 640,000 to 1,600,000 UAH a quarter, how much **more cash** sits in receivables at each quarter end? ## Lines that fund growth and lines that eat cash **Sofia:** So the same growth can release cash in one line and swallow it in another. **Alex Tutor:** Yes. Ask of each line: as it grows, does money arrive before I pay for the work, or after? Prepaid lines fund growth. Lines with terms need funding. **Hanna:** And anything we pay in advance, like a yearly fee to a vendor, ties up cash the same way a receivable does. > **Exercise:** Which of these, as they grow, **tie up** Klasna's cash? Select all that apply. ## Your turn: answer Leo **Leo:** Explain it to me in a way I can repeat to sales: why does profitable Teams growth need cash, when growing packages doesn't? **Alex Tutor:** Compare the two cycles in days, then put a number on what the Teams plan ties up. **Sofia:** Days first, hryvnias second. > **Exercise:** Leo asks: "Why does profitable Teams growth need cash, when growing packages doesn't?" The sales plan grows Teams from 640,000 to 1,600,000 UAH a quarter, invoiced on the last day of each quarter and paid 60 days later. Answer in 3–5 sentences with the cycles in days and what the Teams plan ties up. > **Key ideas** > > - The **cash conversion cycle** is the days between paying for the work and getting paid for it. Klasna's packages: −45 days. Teams on 60-day terms: +95 days. > - **Working capital** = receivables − payables − deferred revenue. Klasna on 30 November 2026: 640,000 − 2,294,300 − 6,523,800 = −8,178,100 UAH. > - Negative working capital means customers and suppliers fund the business. It releases cash as prepaid sales grow and takes it back when they slow. > - Lines with payment terms need funding as they grow: Teams growing from 640,000 to 1,600,000 a quarter ties up another 960,000 at each quarter end. > - Profit per unit and cash per unit are different questions. Ask both before pushing growth. **Alex Tutor:** Next: those 60 days in the Teams contract. What do they really cost, and how do you price them? - Previous lesson: [Case: profitable on paper, short of cash in August](https://productovi.com/courses/finance-for-product/august-cash-case.md) - Next lesson: [Receivables and payment terms](https://productovi.com/courses/finance-for-product/receivables-and-terms.md) --- Productovi Learning. Free, no sign-up needed to read.