Working Capital

What Is Working Capital?

Working capital is the money a business has available to run its day-to-day operations, measured as current assets minus current liabilities. For an Indian SME, the assets side is cash, stock, money owed by customers and, where it can be claimed, unused GST input tax credit. The liabilities side is supplier dues, short-term bank borrowing, and taxes, wages and rent payable within the year.

A positive figure means your short-term assets cover your short-term dues. A negative one is a warning for most businesses, though normal for a few.

The Working Capital Formula and What Goes Into It

Where the money is tied up Cash Stock Receivables Cash back In the bank Bought for sale Sold on credit Collected Where it starts Sits on the shelf Customer owes you Cycle starts again Each rupee waits on the shelf and, if you sell on credit, with a customer. The longer those waits run beyond your supplier credit, the more cash the business needs.

“Current” means due, or turning into cash, within about a year. The usual items for a trading or retail business are below.

The debtors are your accounts receivable, and the creditors are your accounts payable. Put the two sides together and the formula is short:

Working Capital = Current Assets – Current Liabilities

Divide current assets by current liabilities and you get the current ratio: how many rupees of short-term assets stand behind each rupee due. To estimate how much you need rather than what you have today, this working capital requirement calculator works from stock days, collection days and supplier credit days.

Working Capital vs Cash Flow

People mix these up because both are about cash. They answer different questions, though.

A shop can look comfortable on paper and still face a bad week, because most of its money is sitting in stock nobody has bought. That is why the two get read together, and this guide to the cash flow statement shows how the period view is laid out. Managing cash flow day to day means speeding up the cycle shown in the diagram above.

Working Capital Example

A spices wholesaler near Nagampadam in Kottayam sells pepper, cardamom and dried ginger to grocers on 30-day credit. Here is its position on 30 September 2026, just before the festival orders start.

Note: this is an invented example for illustration only. The wholesaler and every figure are made up. Both GST rows are shown before the September return sets one against the other.

So the wholesaler has Rs.11,34,780 of headroom (current assets left over once every short-term due is met) and a current ratio of about 1.59.

Now suppose it buys Rs.4,80,000 more cardamom on 45-day credit for October. Assets and liabilities both rise by the same amount, so the headroom does not move at all, yet the ratio slips to about 1.47.

A balance sheet in the usual Indian format shows both totals, so you can work out the ratio as well as the rupee figure.

Why Growth Can Leave You Short of Cash

Growth means more stock on the shelf and, if you sell on credit, more money waiting with customers before anything comes back. In the retail stores we work with, the crunch rarely shows up in the sales report first; it shows up as stock that has stopped moving.

Supplier credit has limits of its own. If a supplier is a micro or small manufacturer or service provider registered on Udyam, Section 15 of the MSMED Act, 2006 caps your payment period at 45 days from the day you accept the goods (or are treated as having accepted them), or 15 days where nothing is agreed in writing.

Pay late and Section 16 adds compound interest, with monthly rests, at three times the RBI bank rate. The rule does not usually cover traders, or suppliers that are medium-sized or larger. Supplies made before the supplier registered fall outside it too. For all of these, the payment terms are whatever you agree.

Banks usually fund the gap through a cash credit or overdraft limit. The amount you can draw commonly depends on the stock and debtors statement you submit, so slow-moving stock hurts here too.

How much headroom you need depends on the business:

• Restaurants and supermarkets paid at the counter can usually run below zero, as long as supplier credit lasts longer than stock sits
• Service businesses carry little stock, so their figure is mostly cash and debtors
• A seasonal build-up, such as stocking for Onam or Diwali, raises the cash you need for a few weeks even when the net figure barely moves

See Where Your Stock and Customer Dues Sit

For most trading businesses, stock and customer dues are the biggest lines, so look there first. For restaurants, Petpooja POSS runs item-wise auto deduction and gives day-end inventory reports alongside reports on day-end sales, so the stock figure is in front of you.

For retail businesses, Petpooja Invoice carries a Balance Sheet, AR/AP Reports and Inventory Related Reports, which show your stock, customer dues and supplier dues.

Picture opening those reports at month end, before supplier bills fall due, and knowing exactly where your money is tied up.

Frequently Asked Questions