Working Capital Case Study

A working capital case study is a short file about one borrower asking for one thing, with enough financial history attached to decide it. Almost always the request is an increase to a revolving facility, and almost always it arrives with a growth story in front of it.

The arithmetic in these files is quick. The judgment is not, because two very different situations produce the same request form. In one, a business is growing and the growth mechanically carries receivables and inventory the facility exists to fund. In the other, a business is converting less of its revenue into cash than it used to, and the facility increase would fund that gap rather than close it. Both borrowers say they are growing. Both are, on the income statement. The difference is in the cash conversion cycle, and it is legible before anyone opens the credit paper.

It is worth saying what makes a case study collection useless: if every answer is a decline, it is teaching a posture rather than a framework. A reader who finishes it has learned suspicion, which is free, rather than discrimination, which is the job. The two files below are deliberately a matched pair — the same request, opposite answers.

Order matters more than technique here. The mistake that costs candidates and junior bankers most is reading the request first, which anchors everything after it to a number the borrower chose.

Size the need before reading the request. Debtor days plus inventory days minus payables days gives the cash conversion cycle. Divided by 365 and multiplied by revenue, it gives the working capital the business carries at its current size; run on the revenue increment, it gives what the recent growth absorbed. Now the request means something: it is either inside that number, roughly equal to it, or a fraction of it — and each of those is a different conversation. (Revenue is the single scalar here because the reading order needs a size before it needs precision; the strict version — debtor days on revenue, inventory and payables days on cost of sales — is worked on the cash conversion cycle page, and lands within a few per cent.)

Test whether earnings convert to cash. Positive EBITDA alongside negative operating cash flow is not a funding gap. It is a conversion problem, and lending against it does not fix it.

Read the direction of the cycle, not its level. Debtor days lengthening faster than revenue grew means customers are paying more slowly, not merely that there are more of them. Payables stretching may be a negotiated win or a countdown; the accounts do not say which, and the trend usually does.

Then read the request against the absorption. A request that lands slightly under what the arithmetic would justify is a different signal from one that covers a fraction of it. And where a fact is missing, name what you would gate the decision on rather than assuming a value for it.

That sequence is the Three Diagnostics from chapter three of How Bankers Think, and the calculator runs it against numbers you enter yourself — it returns the written read rather than a score. Each term used above is defined at the desk's meaning in the glossary.

A food manufacturer has grown revenue 50 per cent in two years. Operating cash flow has flipped negative while reported earnings stayed positive. The managing director wants a bigger working capital facility, and the request is framed as growth funding.

Run the order. The growth is real on the income statement and the cycle has lengthened underneath it, so the business is holding materially more working capital per dollar of revenue than it used to. Size that absorption and the request turns out to cover less than a third of it. Approving as framed would not fund the growth; it would fund the deterioration, and then arrive back at the same desk in two quarters needing the rest.

The senior banker's read is to decline the request as framed and propose a different conversation — which is not the same as declining the borrower. The full file, the four options, and the reading are in Issue 01 — Pacific Premium Foods.

A precision components manufacturer has grown revenue 36 per cent in two years and asks for an increase to its revolver. On the request form this is the file above.

It is not. Debtor days moved two days across the whole period. Margin expanded while revenue grew, which means the volume was priced rather than bought. Operating cash flow is positive and growing with revenue. Size the cycle — roughly 66 days on US$38m of revenue, about US$6.9m of working capital, of which the most recent US$10m of revenue accounts for roughly US$1.8m — and the US$1.5m request sits slightly under what the arithmetic would justify. The capacity expansion behind the growth was funded separately and is amortising on schedule.

The senior banker's read is to approve as requested, in full and quickly, with the annual review as the only machinery. The interesting part of this file is what it costs to get wrong in the cautious direction: a borrowing base, monthly aged debtors and a tightened covenant package all sound like rigour, and on a clean file they buy the bank nothing while telling the borrower it was read with a template. Structure is a scarce resource priced in relationship currency. The full file is Issue 04 — Highview Industries.

The diagnostics cut both ways. They exist to tell deterioration from growth, and when they say growth, the discipline is to believe them — a clean yes delivered quickly is also a credit skill, and it is what buys the right to be slow and demanding on the files that deserve it.

Read as a pair, the two files also make the general rule visible in a way one file never can: the decision was not driven by the size of the request, the sector, or the strength of the growth story. It was driven by whether the cash conversion cycle kept its shape while the business got bigger. That single question is most of what a working capital case study is testing.

Requests arrive labelled as working capital when the real question is somewhere else, and noticing that is part of the exercise. Issue 02 is a multi-currency facility request where the cycle is ordinary and the risk is that the borrower will not name the currencies — a structuring question wearing a limit request's clothes. Issue 03 is a succession consent, where the bank is being asked to release a guarantee and re-paper security for two successor entities it has never underwritten. Neither is decided by the cash conversion cycle, and treating them as facility arithmetic is how a file gets approved on the wrong question.

Commit to an answer before reading the senior banker's view. The format is built around that and loses most of its value without it — read as prose, a drill is an interesting anecdote; read as a decision, it is a calibration against someone else's judgment.

Time-box the first read to about ninety seconds, which is roughly what an interview panel allows and rather less than a real file gets. Then write the sentence you would actually say to the borrower. Most of the difficulty in credit is not reaching a view; it is saying it in a form the person across the table can act on.

Every borrower here is a fictional composite built for teaching. The figures are internally consistent and deliberately not traceable to any real transaction.