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Check eligibilityWhat working capital is
Working capital measures the short-term cushion a business has to pay its bills. Its size, and how fast it turns into cash, depend on four parts.
1
Cash and bank balances: money available now to pay suppliers, salaries and taxes.
2
Inventory: raw materials, work in progress and finished goods waiting to be sold.
3
Receivables: money customers owe for goods or services already delivered.
4
Current liabilities: amounts due within a year, such as trade payables, short-term loans and the current part of long-term debt.
Positive working capital means current assets cover near-term obligations. Too much ties cash up in stock and receivables. Too little leaves the business short when bills fall due.
When it matters most
Working capital needs rise and fall with the business cycle. They matter most when growth or a long cash conversion cycle stretches funds.
WHAT CHANGES
Tight working capital
Comfortable position
Business stage
Fast growth, new orders, new sites
Steady sales and stable terms
Cash conversion cycle
Long: slow stock, long customer credit
Short: quick stock turns, prompt collection
Buying equipment in cash
Competes with stock and receivables
Easier to absorb
Seasonal peaks
Strain the cash cycle
Absorbed comfortably
How to measure working capital
Working capital = current assets − current liabilities. The current ratio, current assets ÷ current liabilities, puts it in proportion. To see how long cash stays tied up, use the cash conversion cycle.
Cash conversion cycle.
Days inventory outstanding + days sales outstanding − days payables outstanding. It counts the days between paying suppliers and collecting from customers.
Funding the gap.
Short-term bank lines, such as cash credit or overdrafts, usually fund the cycle. Spending cash or drawing these lines on equipment leaves less headroom for stock and receivables.
Under Ind AS 116, the part of a lease liability due within 12 months is a current liability.
Where it shows up
Funding a packaging line without draining cash
ILLUSTRATIVE
A food processor has current assets of ₹50 crore and current liabilities of ₹30 crore, so working capital is ₹20 crore and the current ratio is about 1.67. Its cycle is 60 days of inventory plus 75 days of receivables less 45 days of payables: 90 days. Paying ₹8 crore in cash for a packaging line would cut working capital to ₹12 crore and the current ratio to 1.4, just as the cycle needs funding. Leasing keeps that cash in the business, though under Ind AS 116 the lease liability due within a year counts as a current liability.