Working Capital

Working capital is the cash tied up in the day-to-day running of a business. A manufacturer buys raw materials, processes them into finished goods, sells them on credit, and eventually collects the cash. During this entire cycle, cash is locked up in inventory and receivables. This is working capital, and managing it efficiently is the difference between a business that self-funds its growth and one that constantly needs external capital.

Some businesses have negative working capital by design. Retailers (think DMart) collect cash from customers immediately, pay suppliers on 30–60 day terms, and turn inventory quickly. They get to use their suppliers' money for free. This is a massive competitive advantage that most capital-intensive manufacturers don't have.

Working capital management is often undervalued by students who focus on growth metrics. Yet a company that grows revenues 20% while letting its cash conversion cycle lengthen may actually consume more cash than it generates.

Operating Working Capital (OWC): OWC = Inventories + Trade Receivables − Trade Payables (Exclude cash and short-term debt, which are financing items, not operating.)

Cash Conversion Cycle (CCC): CCC = Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding

• DIO = (Inventory ÷ COGS) × 365: How many days of inventory is held
• DSO = (Trade Receivables ÷ Revenue) × 365: How long to collect from customers
• DPO = (Trade Payables ÷ COGS) × 365: How long before suppliers are paid

A shorter CCC is better, cash cycles back faster.

Example: DIO = 45 days, DSO = 60 days, DPO = 30 days → CCC = 45 + 60 − 30 = 75 days. If revenue is ₹1,000 Cr, each day of CCC ties up ~₹2.7 Cr. Reducing CCC by 10 days frees ₹27 Cr of cash.

Working Capital Intensity = OWC ÷ Revenue. Trending upward is a warning sign.