Working capital management

Capital budgeting decides what to build. Working capital decides whether the company lives long enough to finish.

Working capital is current assets minus current liabilities — in practice, inventory plus receivables minus payables. It is money tied up in operating the business rather than invested in anything.

The cash conversion cycle

$CCC = \text{Inventory days} + \text{Receivable days} - \text{Payable days}$

How many days elapse between paying for inputs and collecting from customers. Every one of those days has to be funded.

Work the problem: $60 + 75 - 40 = \textbf{95 days}$.

For 95 days the business is financing itself. The faster it grows, the more days it has to finance.

Roughly, working capital tied up scales with the cycle and with turnover. With ₹200 crore of cost of sales, growing 50% at the same ratios adds about:

$\frac{95}{365} \times 100 \approx ₹26 \text{ crore}$

of additional cash absorbed — before a rupee of profit is counted. Nothing in that calculation involves profitability, and that is the point: a company can be highly profitable and need an overdraft to grow.

This is chapter 5 of the Accounting subject made operational. Growth consumes cash, and the cycle says how much.

The three levers, and what each costs

Inventory days. Reducing stock releases cash immediately. The cost is stockouts, lost sales, and less buying power — and chapter 7 of the Accounting subject's warning applies in reverse: a company that has cut inventory to the bone has no buffer when supply is disrupted.

Receivable days. Collecting faster releases cash. The cost is customer relationships and, often, sales — credit terms are part of the offer. Tightening them in a competitive market loses business to whoever did not.

Payable days. Paying suppliers later is the cheapest source of finance in the business, and it is not free. The costs are real: loss of early-payment discounts, worse pricing, lower priority when supply is tight, and — for a large buyer dealing with small suppliers — pushing a financing burden onto parties less able to carry it.

A negative cycle is possible and enviable. A retailer that sells for cash and pays suppliers in 60 days is funded by its suppliers; growth generates cash rather than consuming it. Few businesses can arrange this, and those that can have a structural advantage over competitors that cannot.

Why this is where companies actually fail

Chapter 5 of the Accounting subject said companies fail from running out of cash, not from being unprofitable. Working capital is usually the mechanism.

The failure pattern is specific and recognisable:

1. Growth accelerates
2. Receivables and inventory grow with it, consuming cash
3. The company borrows short-term to bridge
4. A delay arrives — a large customer pays late, a shipment slips
5. Short-term facilities are at their limit
6. A profitable business cannot pay its staff

Every step is ordinary. No fraud, no bad project, no collapse in demand. This is why lenders watch the cycle at least as closely as the margin.

Managing it properly

Forecast cash, not profit. A thirteen-week rolling cash forecast is the standard tool, and it is more useful than any annual budget because it has the resolution to show a squeeze before it arrives.

Keep committed facilities, unused. As with leverage in chapter 11, capacity is only valuable before you need it. A facility arranged while healthy is available; one sought while stretched often is not.

Watch the ratios against revenue, not in isolation. Receivables rising with revenue is growth. Receivables rising faster is deterioration — the signal from chapter 15 of the Accounting subject.

Treat supplier terms as a relationship, not a lever. Extending payables is borrowing from people who will remember.

Where it meets the rest of the subject

Working capital is a genuine investment, and chapter 6 included its increase in project cash flows for exactly this reason. A project that looks attractive on operating margins can be unattractive once the cash it absorbs is counted — and that absorption continues for as long as the business grows.

The point

The cash conversion cycle is inventory days plus receivable days minus payable days: the number of days the business must fund itself between paying suppliers and collecting from customers. Growth multiplies it into a cash requirement that has nothing to do with profitability, which is the usual mechanism by which profitable companies fail. Each of the three levers releases cash at a real operational cost, and a negative cycle is a structural advantage.