Working Capital Tied Up in Inventory for FBA
Working capital tied up in inventory is the total cash committed to products sitting in Amazon's warehouses, in transit from your supplier, or held as supplier deposits. This is cash you cannot use for product launches, advertising, hiring, or any other growth activity until those units sell and Amazon disburses the proceeds.
For FBA sellers, the working capital burden is heavier than most retail businesses because lead times from Asian suppliers run 60-90 days, Amazon holds disbursements for 14 days after sale, and suppliers typically demand full payment before shipment. A seller doing $2M per year in revenue with 60 days of supply typically has $200,000-$300,000 locked in inventory at any given time.
Managing working capital is not about spending less on inventory. It is about turning inventory faster so the same dollars fund more sales cycles per year. Every day you shave off your inventory turnover frees cash that compounds when reinvested.
Working Capital in Inventory Formula
Working Capital in Inventory = (Units on Hand × Landed Cost) + (In-Transit Units × Landed Cost) + Supplier DepositsA useful ratio to track:
Inventory-to-Revenue Ratio = Average Inventory Value / Monthly RevenueA ratio above 3.0 means you are carrying more than three months of revenue in inventory, a sign of potential overstocking or slow turns.
Worked Example: FBA Working Capital Calculation
Seller with 15 active SKUs, sourcing from China.
On-hand inventory: Average 400 units per SKU × $10 landed cost = $4,000 per SKU × 15 SKUs = $60,000
In-transit inventory: 3 active shipments averaging 500 units × $10 = $5,000 each × 3 = $15,000
Supplier deposits: 2 pending POs with 30% deposits: 2 × (800 units × $7 product cost × 30%) = $3,360
Total working capital tied up: $60,000 + $15,000 + $3,360 = $78,360
If this seller does $150,000/month in revenue, the inventory-to-revenue ratio is $78,360 / $150,000 = 0.52, meaning about half a month's revenue is locked in inventory. That is healthy. Ratios above 1.5-2.0 signal overinvestment.
FBA-Specific Working Capital Challenges
Amazon's 14-day disbursement cycle. Even after a unit sells, you wait up to 14 days for Amazon to release the funds. New sellers or those with account health issues may face longer reserve holds of 21-28 days, extending the cash gap further.
Supplier payment terms are rare. Most Chinese manufacturers require 30% deposit on order and 70% balance before shipment (T/T terms). Unlike domestic wholesale where Net 30-60 is standard, FBA sellers pay for inventory months before it generates revenue.
In-transit inventory is invisible capital. A sea freight shipment takes 30-40 days on the water plus 7-14 days for customs and FBA receiving. During that entire period, your capital is locked in product that cannot generate any revenue. Sellers with 5+ shipments in transit may have $50,000-100,000+ floating on the ocean.
Common Working Capital Mistakes
Not counting in-transit inventory. Your working capital commitment starts when you pay your supplier, not when units check in at Amazon. Ignoring in-transit stock understates your true capital requirement and leads to cash crunches.
Ignoring supplier deposits. A 30% deposit on a $20,000 PO is $6,000 in cash that is gone the moment you place the order, weeks or months before those units reach FBA. Track deposits as part of your inventory capital.
Over-ordering just in case. Carrying 120 days of supply when 60 days would suffice doubles your working capital requirement for that SKU. Every excess unit ties up cash that could fund PPC, new product development, or supplier negotiations for better pricing.
Related Glossary Terms
How many times you sell through your average inventory per year.
Read →Average days to sell through current inventory.
Read →The direct cost of inventory sold during a period.
Read →Total per-unit cost from factory to FBA warehouse.
Read →How many days current inventory will last at current sales velocity.
Read →Frequently Asked Questions
How much working capital do I need for my FBA business?
A common benchmark is 25-40% of your trailing 12-month revenue held as inventory at any given time. A seller doing $1M per year typically has $250K-400K in working capital tied to inventory, depending on lead times, SKU count, and days of supply targets.
How do I free up working capital without risking stockouts?
Tighten days of supply targets from 90 to 45-60 days, liquidate dead or slow-moving SKUs, negotiate supplier payment terms (Net 30 if possible), and consolidate shipments to reduce in-transit float. Each day of supply you cut frees cash immediately.
Should I use inventory financing?
Inventory financing can accelerate growth when your margins support the interest cost (typically 1-3% monthly). Calculate whether the return from redeploying freed capital exceeds the financing cost. If your contribution margin is 25% and financing costs 2% per month, it can make sense for fast-turning SKUs. Consult a financial advisor for your specific situation.