Working capital is the money tied up in running the business day to day: stock on the shelf and customer dues not yet collected, less what you owe suppliers. It is why a growing business always seems to need more money, even when it is profitable.
01The basic calculation
Working capital = stock + customer dues - supplier dues
For a Morbi tile distributor:
| Item | Amount |
|---|---|
| Stock in godown | ₹1,40,00,000 |
| Customer dues | ₹1,85,00,000 |
| Less: supplier dues | ₹1,10,00,000 |
| Working capital | ₹2,15,00,000 |
This ₹2.15 crore has to come from somewhere: the owner's capital, retained profit or a bank limit such as a cash credit or overdraft.
02Think in days
Amounts are useful, but days tell you more. The cash cycle shows how long your money is out from the time you pay a supplier to the time a customer pays you.
- Stock days
- stock ÷ cost of goods sold per day
- Debtor days
- customer dues ÷ sales per day
- Creditor days
- supplier dues ÷ purchases per day
Cash cycle = stock days + debtor days - creditor days
Worked example
The tile distributor sells ₹18 crore a year, about ₹4,93,000 a day. Cost of goods sold is ₹15 crore, about ₹4,11,000 a day, and purchases are roughly the same.
- Stock days: ₹1,40,00,000 ÷ ₹4,11,000 = 34 days
- Debtor days: ₹1,85,00,000 ÷ ₹4,93,000 = 38 days
- Creditor days: ₹1,10,00,000 ÷ ₹4,11,000 = 27 days
- Cash cycle: 34 + 38 - 27 = 45 days
For 45 days, every rupee of sales is funded by the distributor. At ₹4,11,000 of cost a day, that is about ₹1.85 crore. Each day cut from the cycle frees about ₹4 lakh.
03Why growth eats cash
If the distributor grows sales by 30 percent with the same cash cycle, working capital grows by about 30 percent too: roughly another ₹65 lakh. The profit from the extra sales comes in slowly, while the extra stock and customer credit are needed straight away.
This is why fast-growing small businesses run out of money. Plan the working capital for growth before you chase it.
04Typical cycles by trade
| Business | Stock days | Debtor days | Creditor days | Cycle |
|---|---|---|---|---|
| Kirana, mostly cash | 20 | 5 | 15 | 10 |
| Hardware and sanitary dealer | 60 | 45 | 30 | 75 |
| Garment manufacturer | 75 | 60 | 30 | 105 |
| CA firm or agency | 0 | 50 | 10 | 40 |
| Restaurant | 5 | 0 | 15 | -10 |
These figures are illustrations, and your own will differ. A restaurant can run on a negative cycle because customers pay at once and suppliers give credit. A garment maker needs months of funding for fabric, stitching and dealer credit.
05How to need less working capital
Cut stock days
- Clear dead stock. See dead stock.
- Set reorder levels from actual sales. See reorder levels.
- Buy more often in smaller lots where the price difference is small.
Cut debtor days
- Bill on the day of dispatch.
- Set credit limits and periods, and hold to them. See setting credit limits.
- Follow up every week. See getting paid on time.
- Take advances on made-to-order work.
Use fair supplier credit
- Pay on the agreed due date.
- Negotiate longer terms as your volumes grow, within the 45 day limit for micro and small suppliers.
06A worked example of cutting the cycle
The tile distributor sets three targets for the year:
- Stock days from 34 to 28
- clear discontinued designs and reorder from sales.
- Debtor days from 38 to 32
- weekly follow-up and a hold on supplies at 15 days overdue.
- Creditor days stay at 27,
- within agreed terms.
If it reaches them, the cash cycle falls from 45 days to 33. At about ₹4,11,000 of cost a day, 12 days is close to ₹50 lakh released. At an interest rate of 10 percent on the bank limit, that saves about ₹5 lakh a year in interest, before counting the room it gives for growth.
The same arithmetic works for a small business. A hardware shop with ₹60,000 of cost a day that cuts its cycle by ten days frees ₹6 lakh.
07Why working capital needs watching every month
Working capital changes quietly. A few customers start paying later, a scheme fills the godown, a supplier shortens its terms. None of these is a crisis on its own. Together, over a year, they can double the money the business needs. Calculating the three day counts each month, from your own books, shows the change while it is still small.
08Funding working capital
Most small businesses fund working capital with a mix of the owner's money and a bank limit. Banks set working capital limits based on stock and customer dues, often with a monthly stock statement. A business that knows its cash cycle and can show it improving will find those conversations easier. Ask your bank and CA about the facilities that suit your business.
Avoid funding working capital with money meant for something else, such as GST collected or staff PF deducted. Those amounts belong to others and have fixed due dates, and paying them late brings interest and penalties that cost far more than an overdraft.
09For larger businesses
Track the cash cycle every month, by product line and by branch. One branch with 90 debtor days can hide behind others at 30. Set targets for stock days and debtor days in the annual plan, and link sales incentives to collections as well as billing.
In MatruOS, the Home screen shows money to collect, money to pay and low stock, the three parts of working capital you manage every day.