Deeptech Hardware Working Capital: Inventory Cycles and Cash Flow Planning for Founders

Hardware Working Capital Planning: Inventory Cycles

For a hardware founder, few things are more unsettling than looking at a positive profit and loss statement while the company’s bank balance is plummeting. This is not a sign of failure; it is a predictable symptom of the physical goods business. The long, capital-intensive gap between paying for components and getting paid by customers defines the challenge of hardware working capital. Success depends less on the elegance of your product and more on your ability to model and manage the cash needed to survive this inventory cycle. This article provides a practical framework for founders, who often act as their own finance leads, to build a simple, dynamic model that connects production plans to runway and prevents avoidable cash crunches. For broader budgeting and capex guidance see the Hardware NPI Costing & Capex topic.

Understanding the Hardware Cash Conversion Cycle (CCC)

At its core, hardware inventory management is about managing your Cash Conversion Cycle (CCC). This metric measures the time, in days, from when you spend cash on inventory to when you receive cash back from a customer. For software companies, this cycle is often negligible. For hardware, it’s the central operational challenge. The reality for most Pre-Seed to Series B startups is more pragmatic: you don't need a perfect CCC calculation, but you must understand its components.

We can break it into three distinct stages: Procurement, Production, and Payback. Understanding how cash moves through these stages is the key to inventory cash flow planning. For context, a hardware startup's Cash Conversion Cycle (CCC) can be 180-270 days. This extended timeline means a significant portion of your capital is constantly tied up, not in your bank account, but in components, assembly lines, and boxes on a pallet.

Stage 1: Procurement and Component Lead Time Budgeting

This stage answers the first critical question: how much cash do I need for components, and when must I pay it? Founders often start with a Bill of Materials (BOM) focused on unit cost. For cash planning, however, you need a “Lead Time BOM.” This document shifts the focus from cost to timing, mapping out not just what you need to buy, but when you need to order it based on supplier lead times.

Component lead time budgeting is a non-negotiable discipline. Post-2021, standard MCU lead times have fluctuated from 16 weeks to over 52 weeks. A one-year lead time on a critical component means you must pay for it a full year before you can even begin production, let alone generate revenue. This is compounded by supplier payment terms, which commonly include 50% upfront with 50% on shipment, or Net 30 after delivery. An upfront payment for a component with a 52-week lead time is a massive, early cash outlay. Remember to also check import VAT and duties on imports for components.

A scenario we repeatedly see is a deeptech company finalizing its design for a commercial launch. The cost BOM looks manageable. But when they create a Lead Time BOM, they discover a specialized sensor has a 48-week lead time and requires 75% payment upfront. Suddenly, their launch is delayed by almost a year, and they need to spend a huge portion of their seed funding on a single part, long before the first unit can be assembled.

Stage 2: Production and Managing Work-in-Progress (WIP) Costs

Once components arrive, cash continues to be absorbed into Work-in-Progress (WIP), which is the value of inventory currently undergoing assembly. This stage addresses the next question: how does my production forecast impact my cash flow and risk? A production forecast is a bet on future demand, and every dollar spent on WIP is cash that cannot be used for salaries or marketing.

This is where inaccurate forecasting, a top pain point for founders, becomes so dangerous. What founders find actually works is not creating a single, optimistic forecast but modeling three scenarios: Bull, Base, and Bear. This allows you to quantify your cash risk. Consider a startup with a Base forecast to produce 1,000 units at a WIP cost of $500 each, tying up $500,000. If actual demand is 30% lower (700 units), they are now sitting on an extra 300 units of finished goods. That is $150,000 in cash trapped in the warehouse, directly reducing their runway.

This overproduction not only drains cash but also increases storage costs and the risk of obsolescence, creating pressure to discount products and hurt margins. Planning with scenarios helps you set pre-defined triggers for scaling production up or down, making your inventory cash flow planning proactive instead of reactive. When you are selecting a partner to produce those units, use a structured cost model. See guidance on manufacturing partner comparisons in the Manufacturing Partner Selection: Cost Modeling guide.

Stage 3: Payback and Converting Revenue to Cash in the Bank

This final stage answers the most important question for your bank account: when does the cash from sales *actually* hit my bank account? A critical distinction every hardware founder must internalize is Revenue vs. Cash. Your accounting software, such as QuickBooks in the US or Xero in the UK, will recognize revenue when you ship a product. But you cannot pay salaries with recognized revenue. You can only use collected cash.

The time it takes to convert a sale into cash-in-bank depends entirely on your sales channels. The terms can vary dramatically, creating a blended and often confusing cash collection timeline. For direct sales, the cycle is short. Direct-to-Consumer (DTC) payouts via Stripe or Shopify are typically 2-7 days. This channel is excellent for cash flow. However, scaling often requires moving into larger channels with much longer payment terms.

In practice, we see that retail and distribution partnerships, while great for volume, are challenging for working capital. Retail and distribution channels often have Net 60 or Net 90 payment terms. This means that after you ship a product, you are effectively providing your retail partner with a 60 or 90-day interest-free loan. A large purchase order from a major retailer might look great on your revenue forecast, but it can trigger a severe cash crunch if you don’t have the reserves to float your operational costs for three months while waiting for payment.

How to Calculate Hardware Inventory Cash Needs: A Dynamic Model

How can you build a simple model to connect these stages and predict cash crunches? The answer is not a complex financial statement model but a straightforward cash flow forecast in a spreadsheet. This model directly addresses the pain point of not having a connected view of your build schedule, payment terms, and runway. Its purpose is singular: to predict your future cash balance and identify when you might run out. You can build a useful version with five columns:

1. Month: Your time horizon (e.g., Month 1, Month 2).
2. Cash In: All cash receipts. This includes cash from sales (factoring in channel-specific delays), new financing, or grants.
3. Cash Out: All cash payments. This includes component payments (timed by your Lead Time BOM), assembly costs, salaries, rent, and marketing.
4. Net Monthly Cash Flow: The simple calculation of (Cash In - Cash Out).
5. Ending Cash Balance: The previous month's ending balance plus the current month's net cash flow. This is your most important metric.

The goal is to see when the 'Ending Cash Balance' turns negative. By linking your sales forecast (with Base, Bull, and Bear scenarios) to Cash In and your Lead Time BOM to Cash Out, you create a dynamic tool. You can now ask critical questions like, “What happens to my runway if my biggest component's lead time doubles?” or “How much extra cash do I need to survive if my new retail partner pays on Net 90 terms?” Use a ready cashflow template to get started and iterate quickly. A practical Excel cashflow guide can speed the first pass.

Key Takeaways for Managing Hardware Working Capital

Managing hardware working capital is a game of foresight. It's about anticipating cash needs months in advance, not reacting to a low bank balance. For founders in the UK and US operating without a full-time CFO, a pragmatic approach is essential. Here are the key principles to follow:

• Focus on a Lead Time BOM. Shift your focus from a standard costing BOM. Your cash needs are dictated by timing, not just price.
• Always model scenarios. A single-point forecast is a liability. Planning for Bull, Base, and Bear cases helps you understand and mitigate your cash flow risk.
• Distinguish revenue from cash. Your spreadsheet cash model shows survival; the revenue in your accounting system does not pay the bills.
• Obsess over terms. Negotiating a 25% upfront payment instead of 50% with a supplier or securing Net 30 terms from a distributor can fundamentally improve your cash conversion cycle and extend your runway.
• Embrace simplicity. A simple, dynamic spreadsheet that you actually use is infinitely more valuable than a perfect, static model that sits untouched.

By connecting procurement, production, and payback, you can transform working capital from a source of anxiety into a strategic advantage. For further detail on budgeting and capex, see the Hardware NPI Costing & Capex topic.