Financial Management and Cash Flow Control in a Children’s Clothing Industry

Ewerton José Silva de Lima; Samia Mercado Alvarenga

DOI: 10.22167/2675-6528-202602876

Article derived from a Course Conclusion Work (TCC), with content based on the student’s original work and adapted to the editorial format of the E&S Magazine with the support of the ResumeAI tool, an artificial intelligence solution developed by Instituto Pecege for textual synthesis and organization.

Summary

The research diagnosed the factors associated with cash flow breaks in a children’s clothing industry, aiming to support proposals for improvement in financial management and cash control. An applied study was conducted, descriptive in nature, with documentary analysis of financial reports, internal controls, and operational data from 2025 to 2026. The results indicated that liquidity problems did not stem from the calculation of production costs, but rather from the lengthening of the financial cycle, the high immobilization of resources in inventories, the commitment of cash to operational and financial obligations, and the insufficiency of markup in pricing. The combination of these elements generated pressure on working capital and the need for third-party capital. Given this scenario, measures were implemented to restructure the posting model, reduce inventory levels, renegotiate liabilities, and adjust the pricing policy. It was concluded that the integration between operational, financial, and strategic management is fundamental for business sustainability, with the alignment between costs, pricing, and financial cycle being determinant for cash generation and liquidity maintenance.

Keywords: Working capital; Indebtedness; Liquidity; Markup; Pricing.

1. Introduction

The children’s textile sector operates in highly competitive markets subject to demand variations, where strategic cash flow management is fundamental to the business’s sustainability. Cash flow is recognized as the main financial control instrument, allowing the evaluation of a company’s liquidity and value generation capacity (Assaf Neto, 2020).

However, many organizations, even with satisfactory operational performance, face cash shortages. These failures are often attributed to poor inventory management, disorder between operational and financial cycles, and a poorly constructed cost structure (Padoveze, 2019; Gitman and Zutter, 2018). The absence of adequate strategic financial planning can generate imbalances in working capital and compromise long-term sustainability (Ross et al., 2022).

Inventory management, for example, directly impacts fixed assets and immediate liquidity, becoming a critical point for financial performance (Dias, 2020). Furthermore, strict control of fixed, variable, and financial expenses is essential, as uncontrolled growth of these costs can compress margins and reduce market competitiveness (Leone, 2019).

The pricing of products, in turn, must consider not only direct and indirect costs, but also the strategic positioning of the brand and market conditions. Price setting is a complex decision that influences the perception of value and profitability (Kotler and Keller, 2022). An inadequate pricing policy can, however, mask negative margins and compromise the economic viability of the business (Martins, 2021). Understanding the factors that contribute to cash flow breakdown is crucial to ensure operational liquidity, optimize profit margins, guarantee financial health, and enable the necessary reinvestment for the continuity of operations (Brigham and Ehrhardt, 2021).

Given this scenario, the central problem lies in the recurrence of cash flow disruptions in children’s clothing industries, even with apparent operational solidity, indicating the need to identify the underlying factors of these imbalances. The relevance of this study lies in its contribution to the improvement of financial management in industrial organizations, particularly concerning cash flow control, a vital element for the sustainability and continuity of operations. Thus, the present work aims to diagnose the factors associated with cash flow disruptions in a children’s clothing industry, with the purpose of supporting proposals for improvement in financial management and cash control.

2. Material and Methods

The research was applied in nature and descriptive in character, conducted through a case study in a children’s clothing industry located in Caruaru, Pernambuco. The medium-sized company has 107 employees and 30 years of operation in the national market, with the empirical object being the analysis of a real financial management problem.

Data collection was carried out through documentary analysis, with formal access to the organization’s internal information through the signing of a Term of Agreement by the owner. Monthly cash flow reports, income statements (DRE), accounting balance sheets, bank statements, inventory controls (in units and values), production records, raw material purchase reports, accounts payable and receivable, receivable anticipation operation lists, and internal cost formation and pricing spreadsheets were collected and analyzed.

The analyses were structured from different temporal cutoffs. The evaluation of the financial cycle and the relationship between disbursements and cash inflows considered a complete acquisition, production, and commercialization cycle, from August 2025 to February 2026. The inventory levels of raw materials, work-in-progress, and finished goods were analyzed based on positions determined on January 06 and February 06, 2026, using internal reports and operational records.

The assessment of the financial cost associated with the immobilization of resources in raw material considered a production cycle between May and December 2025, covering the entry of inputs into stock and the finalization of product sales. For this analysis, data on purchases, raw material consumption, and pricing information were used. The verification of the commitment of revenue with supplier payments, bank debt, and accounts receivable discounting operations was based on monthly data from October 2025 to January 2026.

The selling price formation was determined by applying a “markup” index to the unit cost of the products. The unit cost of the product comprised raw materials, notions, labor costs, and processing service costs. The “markup” was calculated considering percentages of fixed expenses, variable expenses, and the desired net profit margin, obtained from the analysis of the financial statements and internal company records, from January to December 2025.

For the analysis of the pricing practiced, the different commercial tables adopted and their participation in the total sales volume were considered. The company operates with two distinct brands, each with strategic positioning and differentiated commercial policies. The weighted average “markup” was calculated for each brand and for the operation as a whole, considering the participation of each table in the sales volume.

Pricing simulations were carried out to evaluate the impact of incorporating the financial cost of storage in the formation of selling prices. Scenarios were defined with full and partial application of this cost on the raw material. The monthly financial cost rate for the simulations was estimated from the average of the charges observed in the company’s resource acquisition operations, including loans, financing, and receivables anticipation.

The collected data were organized and analyzed descriptively, with the objective of identifying patterns and relationships between cash flow breaks and the financial, purchasing, inventory management, and pricing processes. The approach used the logic of data triangulation to confront empirical information with specialized literature in financial management, cash flow, and inventory control.

The diagnosis was limited to the specific periods covered in the analyzed records. The temporal cutoffs were defined according to the availability of records and the nature of each analysis performed, without the purpose of inferring the permanent occurrence of the observed phenomena or generalizing them to other periods and organizations.

3. Results and Discussion

The analysis of the financial and operational records of the children’s clothing industry revealed that recurring cash flow breaks were not primarily linked to an inadequate calculation of production costs. Instead, the financial imbalances were attributed to an interdependent set of factors, including the lengthening of the financial cycle, excessive capital immobilization in inventory, significant cash commitment to operational and financial obligations, and an insufficient markup pricing policy. These elements, taken together, exerted pressure on the company’s working capital and intensified the need to resort to third-party capital sources to maintain operational liquidity.

The model of launching two major annual collections, as evidenced by the financial, productive, and commercial timeline, required a high anticipation in raw material acquisition. This process resulted in financial disbursements concentrated in periods prior to cash inflows, generating a prolonged immobilization of resources in inventory. The purchase of raw material, made on August 15, 2025, and the start of sales, on February 06, 2026, demonstrate an interval of approximately six months. Additionally, the average invoicing and collection periods for sales, which totaled about 90 days after the start of sales, further extended the operation’s financial exposure period.

This temporal mismatch between disbursements and cash inflows was directly associated with the occurrence of negative cash balances in several months of the analyzed cycle. This scenario corroborates the concept of the financial cycle by Assaf Neto (2020), which emphasizes how the extension of this interval compromises the operational liquidity of companies. The need for working capital to sustain operations during this extended period became a constant challenge, impacting the company’s ability to honor its financial commitments without resorting to external financing.

The analysis of inventory levels, recorded on January 6, 2026, and February 6, 2026, revealed the maintenance of high volumes of raw material and finished products. In January 2026, the company had 20,396 units of products in production and 42,185 units of finished products in stock, in addition to a raw material inventory valued at R$ 2,263,978.43. In February 2026, the volume of finished products increased to 28,887 units in production and 51,418 units in stock, while the value of raw material marginally decreased to R$ 2,193,944.26.

These results indicated that, in the period immediately prior to the start of commercialization, the company maintained significant inventory volumes without the corresponding generation of cash inflows. The expansion of finished goods inventories, coupled with the maintenance of high levels of raw materials, contributed significantly to the immobilization of financial resources. This situation generated considerable pressure on cash flow, aligning with the perspective of Dias (2020), who emphasizes how high inventories immobilize capital and reduce the immediate liquidity of organizations, hindering working capital management.

The estimate of the financial cost of raw material in stock demonstrated the impact of resource immobilization throughout the production cycle. The raw material remained in stock for a total period of seven months, from its arrival in May 2025 until the end of sales in December 2025. For the purpose of calculating the financial impact, a relevant average holding period of 4.5 months was adopted, considering that the financial cost is incurred while the input is not converted into a sold product. With a monthly financial cost rate of 1.8%, the estimated financial cost for immobilization was 8.1%.

These findings underscore the direct effect of the cost of capital on pricing and company profitability, as highlighted by Gitman and Zutter (2018), who emphasize the influence of financial costs on operational and investment decisions. Failure to incorporate this cost into pricing or underestimating its impact can lead to illusory profit margins and an undervaluation of the working capital needed to sustain the production cycle. The correct consideration of the financial cost associated with operational assets is, therefore, crucial for preserving liquidity and financial sustainability, as pointed out by Assaf Neto (2020).

To evaluate the impact of the financial cost of raw material on the formation of selling prices, comparative simulations were performed. In the current scenario, where this cost is not incorporated, the selling price was R$ 49.32. By fully incorporating the financial cost (8.1%) on the value of the raw material, the selling price would increase to R$ 51.58, representing an increase of 4.58%. In a scenario of partial incorporation (5.5%), the selling price would be R$ 50.85, with an increase of 3.11% compared to the current scenario.

The full incorporation of the financial cost, while promoting a more complete recomposition of margins, implies a more significant price increase, which could compromise the company’s competitiveness in the market. Partial incorporation, in turn, offers a more moderate impact, suggesting an alternative that balances the absorption of financial costs with the maintenance of price levels. It is important to note that the financial cost was applied exclusively to the value of the raw material, not affecting other components of the product cost, such as labor, reinforcing the importance of efficient management of input inventories for the balance between costs, prices, and cash generation (Gitman and Zutter, 2018).

The analysis of the commitment of monthly revenue with payments to raw material suppliers revealed a growing impact on cash flow. In October 2025, disbursements to suppliers represented 14.43% of monthly revenue. This percentage rose to 25.33% in November 2025 and reached 57.66% in December 2025. In January 2026, the situation became critical, with payments to suppliers exceeding monthly revenue, reaching 127.57% of the income earned in the period.

This pronounced mismatch between disbursements for the acquisition of inputs and cash inflows from sales contributed directly to cash deficits and the need to resort to third-party capital. Such behavior is aligned with the discussion by Padoveze (2019), who highlights how the misalignment between the operational cycle and the financial cycle can compromise the sustainability of companies, especially in contexts where disbursements are anticipated and cash inflows are postponed, generating constant pressure on liquidity.

Financial indebtedness also had a significant impact on cash flow. Loan and financing installments compromised a relevant portion of monthly revenue, increasing from 7.51% in October 2025 to 9.53% in November 2025 and 11.70% in December 2025. In January 2026, the commitment reached 28.82% of monthly revenue, evidencing an intensification of financial pressure on the company in a context of low cash generation.

These financings were frequently necessary to cover cash shortfalls arising from the temporal mismatch between disbursements and financial inflows. Ross et al. (2022) point out that increased indebtedness, especially in scenarios of low cash generation, compromises financial sustainability and elevates the risk of working capital imbalance. The reliance on third-party capital, although it can resolve short-term liquidity problems, incurs financial costs that erode margins and long-term value generation capacity.

Additionally, tax installments contributed to the compromise of monthly revenue. Payments of renegotiated tax debts represented 1.62% of revenue in October 2025, increasing to 2.08% in November, 3.19% in December, and reaching 7.97% in January 2026. Although the absolute values of tax installments were lower than those of bank loans, their relative impact became significant in months with lower revenue, increasing pressure on operational cash flow and the need for rigorous management to avoid further shortfalls.

The recurrent use of discounting of bills and checks as a mechanism for obtaining liquidity was also observed. Between October 2025 and January 2026, the company anticipated a gross amount of R$ 3,818,721.19 in receivables, incurring a total financial cost of R$ 179,274.43, due to interest, fees, and discounts charged by financial institutions. The average monthly costs of these operations ranged between 4.09% and 5.14% of the amounts anticipated, increasing the company’s financial expenses.

This dynamic highlights the cost of dependence on third-party capital, as pointed out by Assaf Neto (2020), who emphasizes that the anticipation of receivables, although increasing immediate liquidity, reduces value generation over time due to the financial costs involved. The company found itself in a situation of continuous dependence on this instrument, with cash availability conditioned on sales realization and the subsequent anticipation of these amounts, which limits financial autonomy and long-term planning capacity.

Regarding the cost structure and pricing model, the data indicated that, although production costs were adequately calculated, the markup practiced did not ensure full coverage of operational and financial expenses. The markup calculation necessary for total cost and expense coverage of the operation would be 2.94. However, the company operated with a weighted average markup of 2.42, considering the participation of different commercial tables in sales volume.

This gap of approximately 0.52 in the markup practiced in relation to the level required for full expense coverage indicates that the company’s pricing policy was not fully aligned with its cost structure. Consequently, there was a partial absorption of expenses and a deterioration of operating margins, which compromised cash generation capacity. Leone (2019) and Martins (2021) emphasize that inadequate pricing can compromise the absorption of costs and expenses, reducing margins and directly affecting the financial sustainability of organizations.

Faced with the diagnosis, managerial measures were adopted to mitigate cash flow disruptions. The collection launch model was reformulated, moving from two major annual launches to staggered launches every two months. This change aimed to reduce the volume of advance raw material purchases, increase inventory turnover, and shorten the financial cycle, allowing inputs to be converted into marketable products in less time, in addition to meeting market demand for more frequent launches.

Regarding the financial cycle, negotiations with suppliers were strengthened to extend payment terms, minimizing the financial “gap” between payments to suppliers and sales receipts. For inventories, immediate invoicing of finished product sales was adopted to accelerate cash inflow. Raw material purchases were temporarily suspended until April 2026, implementing a policy of reusing existing materials to reduce resource immobilization and the volume allocated to suppliers.

Regarding financial indebtedness, negotiations were initiated with financial institutions to reduce the cost of capital and extend debt maturities, seeking to decrease the value of monthly installments and, in some cases, obtain grace periods of up to 12 months. In tax indebtedness, the company maintained regular installment payments and sought programs for early settlement with reduced charges. In relation to the discounting of receivables, negotiations were intensified to obtain more advantageous conditions on the applied rates, projecting a gradual reduction in dependence on these operations with the adjustment of financial cycles.

In the cost and pricing structure, the company maintained rigorous product cost accounting and incorporated a 5.5% adjustment on the cost of raw materials in the sales price formation, gradually, so as not to abruptly impact competitiveness. The markup lag was recognized, and a progressive review was established for the 2026 launches, with the objective of increasing the operation’s average markup and rebalancing the cost and expense structure. These measures are aligned with good practices in working capital management and pricing, which emphasize the balance between operational terms, cost structure, and pricing policy for financial sustainability (Assaf Neto, 2020).

In summary, the research results indicated that the cash flow disruptions in the children’s clothing industry stemmed from an elongated financial cycle, high fixed assets in inventory, cash commitment with obligations, and inadequate pricing that did not fully cover expenses. The managerial measures implemented aimed to restructure the launch model, optimize inventory management, renegotiate liabilities, and adjust the pricing policy, seeking to rebalance cash flow and strengthen the company’s liquidity.

4. Conclusion

The present study sought to diagnose the factors associated with cash flow breaks in a children’s clothing industry, with the purpose of supporting proposals for improvement in financial management and cash control. It was found that liquidity imbalances did not stem from failures in production cost calculation, but rather from an interdependent set of elements. The elongation of the financial cycle, the high immobilization of resources in inventory, the significant commitment of cash to operational and financial obligations, and the insufficiency of the markup practiced in pricing were identified. The combination of these factors generated pressure on working capital and the need for third-party capital, evidencing the fragility of financial management in the face of operational dynamics. Given this scenario, the study contributed to the proposition and implementation of managerial measures, such as the restructuring of the billing model, the optimization of inventory management, the renegotiation of liabilities, and the gradual adjustment of the pricing policy, aiming to rebalance cash flow and strengthen the company’s liquidity.

The main practical contribution of this work lies in demonstrating the applicability of financial management tools for the systematic monitoring of working capital and cash flow, reinforcing the importance of integration between operational, financial, and strategic decisions for business sustainability. However, the study was limited to a single organization and specific historical data, which restricts the generalization of results to other contexts. It is suggested that future studies expand the sample of companies analyzed, explore different sectors and production contexts, and deepen discussions on cash flow management. It is also recommended to adopt a periodic routine for monitoring the financial cycle and working capital, including monitoring payment terms to suppliers, inventory turnover time, sales collection periods, revenue commitment to financial obligations, and the markup practiced, allowing for proactive adjustments in purchasing, production, sales, financing, and pricing decisions.

Bibliographic References

ASSAF NETO, Alexandre. Finanças corporativas e valor. 8. ed. São Paulo: Atlas, 2020.

BRIGHAM, Eugene F.; EHRHARDT, Michael C. Administração financeira: teoria e prática. 16. ed. São Paulo: Cengage Learning, 2021.

DIAS, Marco Aurélio P. Administração de materiais: princípios, conceitos e gestão. 9. ed. São Paulo: Atlas, 2020.

GITMAN, Lawrence J.; ZUTTER, Chad J. Princípios de administração financeira. 15. ed. São Paulo: Pearson, 2018.

KOTLER, Philip; KELLER, Kevin Lane. Administração de marketing. 16. ed. São Paulo: Pearson, 2022.

LEONE, George S. G. Custos: planejamento, implementação e controle. 4. ed. São Paulo: Atlas, 2019.

MARTINS, Eliseu. Contabilidade de custos. 12. ed. São Paulo: Atlas, 2021.

PADOVEZE, Clóvis Luís. Controladoria estratégica e operacional: conceitos, estrutura e aplicação. 6. ed. São Paulo: Atlas, 2019.

ROSS, Stephen A.; WESTERFIELD, Randolph W.; JORDAN, Bradford D. Administração financeira: fundamentos. 12. ed. Porto Alegre: AMGH, 2022.

Article originating from the Final Course Work of the Specialization in Business Management of the MBA USP/Esalq

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