Why the order backlog weighs on working capital
A full order book is often read as a positive signal: future revenue secured, visibility over coming months, confirmation of demand. In a Swiss SME, however, every accepted order triggers immediate costs — raw materials, production hours, subcontracting, project expenses — while payment only arrives on delivery or, worse, 30–60 days after invoicing.
The result is a structural gap between accounting profit and available liquidity. The backlog does not appear as a separate line item on the balance sheet, but translates into inventory, work in progress, trade receivables and, sometimes, customer deposits received. Without an integrated reading of these elements, it is easy to approve new orders that silently erode working capital and force reliance on bank credit at rising interest rates.
This guide explains how to quantify cash flow tied up in the order portfolio, identify typical pressure points for SMEs in Switzerland and activate operational levers that release liquidity without cutting prices or margins.
How much cash flow stays tied up: the practical formula
Capital tied up by the backlog is estimated by cross-referencing the value of orders in progress with the actual operating cycle. For a manufacturing or project-based services SME, a useful formula is:
Tied-up cash ≈ Value of orders in progress × (% costs incurred in advance − % collected)
Where orders in progress indicates the value of jobs started and not yet invoiced (or invoiced but not collected), costs incurred in advance the share of cost already borne relative to completion and collected deposits and payments already received on the same portfolio.
Example: a backlog of CHF 800,000 with average progress at 40% and no deposits collected implies roughly CHF 320,000 in costs already incurred or committed, to which any dedicated inventory and accrued but unpaid trade receivables must be added.
| Indicator | Formula / source | What it signals |
|---|---|---|
| Commercial backlog | Sum of confirmed orders not invoiced | Future volume and operational pressure |
| Net working capital (NWC) | Current assets − Current liabilities | Operating liquidity buffer |
| DSO (Days Sales Outstanding) | (Trade receivables ÷ revenue) × 365 | Average days to collect after invoicing |
| DPO (Days Payable Outstanding) | (Trade payables ÷ purchases) × 365 | Room for manoeuvre with suppliers |
| Cash conversion cycle | Days inventory + DSO − DPO | Days cash remains out of the till |
| Contribution margin per order | Revenue − direct variable costs | Capacity to sustain internal financing |
Where capital hides in orders in progress
The backlog manifests in different balance sheet line items depending on the business model. Recognising them avoids confusing revenue growth with financial strength.
Inventory and tied-up materials
Components purchased for specific orders remain on the asset side until delivery. In companies with long lead times or imports, a significant share of working capital can be tied up months before revenue is recognised.
Work in progress and capitalised costs
Engineering, installation or consulting projects accumulate hours, subcontracting and direct expenses. Under Swiss GAAP FER 22 (long-term contracts), production costs may be capitalised as work in progress; with the percentage-of-completion method, revenue and costs are recognised proportionally to progress, otherwise upon completion.
Trade receivables and milestone billing
Even with partial invoicing, late payments extend DSO. Contracts requiring formal customer acceptance before invoice issuance further widen the gap between cost incurred and collection.
Customer deposits received (offsetting liability)
Customer deposits reduce net tied-up cash and appear on the liability side until the order is fulfilled. A backlog without structured deposits exposes the company to the risk of fully financing the customer.
Warning signs in accounting and reporting
Certain recurring variances in the income statement and balance sheet indicate that the backlog is consuming liquidity faster than margins can offset.
- →Revenue growth with NWC declining: new orders absorbed without deposits or with extended payment terms.
- →DSO rising quarter on quarter: invoices issued but collections slower, often on complex jobs with milestone disputes.
- →Inventory or work in progress growing faster than the backlog: production inefficiency, waste or orders blocked awaiting customer approval.
- →Positive profit and negative operating cash flow: the classic working capital gap; the balance sheet «looks fine», cash does not.
- →Increasing use of the credit line: if funding needs track the order portfolio, the problem is structural, not cyclical.
Integrated accounting software — such as Accountex — links orders, invoices, payments and cost centres by project, making tied-up cash visible per job rather than only at total balance sheet level.
How to unlock liquidity without eroding margins
Cutting prices or accepting discounts to accelerate collections is rarely necessary. Swiss SMEs have commercial and operational levers that preserve contribution margin.
1. Deposits and progress billing
Structuring contracts with a deposit on order (typically 20–40% on industrial or IT jobs) and interim invoices linked to verifiable milestones aligns collection with resource consumption. In Switzerland, deposits are generally subject to VAT upon receipt of the consideration if the service is identifiable (Art. 40 para. 1 let. c VAT Act); with billing based on agreed consideration, issuing the invoice may trigger the tax liability even before performance. For ongoing services or special cases, check with your tax adviser.
Typical effect: 25–50% reduction in net tied-up cash on the same backlog.
2. Renegotiate terms with solid customers, not discounts
Moving from net 60 to net 30 days, or introducing a 2% cash discount within 10 days, costs less than a permanent 5% list price reduction. The key is to offer the customer alternatives — advance payment, bank transfer (QR invoice), card — without touching the list price.
3. Sequence orders by cash flow profile
Not all orders have the same impact: a job with a 30% deposit and standard materials releases capital; a custom project with long imports absorbs it. Prioritising acceptance based on margin and funding requirement avoids turning down useful revenue while accepting orders that strain liquidity.
4. Optimise the supplier side (without damaging relationships)
Slightly extending DPO with non-strategic suppliers, negotiating just-in-time deliveries or consignment stock releases working capital without touching the selling price. Note: critical suppliers in the order chain deserve prompt payment to secure delivery priority.
5. Selective factoring on mature receivables
Assigning receivables from investment-grade customers converts invoices into immediate liquidity. The cost (interest + fees) should be compared with the credit line rate and the opportunity cost if missing cash blocks new high-margin orders. It does not replace deposits and milestones, but complements the tool mix.
Accounting treatment and Swiss taxation
Correct recording of orders in progress is essential for a reliable balance sheet and tax returns (profit tax at federal, cantonal and municipal level).
Revenue recognition: under Swiss GAAP FER, revenue is generally recorded when risk and economic benefit transfer to the customer; for long-term contracts, Swiss GAAP FER 22 provides for proportional recognition (percentage of completion) when the required conditions are met, otherwise the completed-contract method. With billing based on agreed consideration, issuing the invoice may trigger VAT liability before performance (Art. 40 para. 1 VAT Act); for profit tax, the taxable base follows commercially valid accounting (Art. 58 FDTA), so deposits and deferred revenue do not contribute to income until performance is rendered.
Customer deposits received: recorded as liabilities (performance obligations) until fulfilment. For VAT, the deposit is generally taxable upon receipt if linked to an identifiable service (Art. 40 para. 1 let. c VAT Act).
Work in progress: direct costs may be capitalised; under FER 22, revenue and costs align with the degree of completion or, if requirements are not met, at contract completion. Excess capitalisation above realisable value must be written down — a relevant requirement in audit and due diligence.
Documenting for each significant order the billing plan, costs incurred and progress status reduces year-end risks and facilitates dialogue with banks and investors on working capital requirements.
Operational checklist for management and finance
Concrete actions to integrate into the monthly management control cycle:
| Action | Owner | Frequency |
|---|---|---|
| Calculate backlog, tied-up cash and NWC | Finance / CFO | Monthly |
| Cash report per job (costs vs collections) | Management accounting | Weekly on orders > CHF 50,000 |
| Review DSO and receivables ageing over 60 days | Credit management | Weekly |
| Review deposit clauses on new quotes | Sales + legal | Per quote |
| Align purchases with production milestones | Operations / procurement | Ongoing |
| Compare operating cash flow with net profit | Management | Quarterly |
A backlog managed with clear metrics does not limit growth: it makes it sustainable. Measuring how much cash stays tied up, acting on deposits and the collection cycle and reading accounting signals allows Swiss SMEs to fulfil orders in the portfolio without sacrificing margins or relying excessively on bank debt.