DotOne teamWhat is working capital?
Working capital is the difference between what a business owns in the short term and what it owes in the short term:
Working capital = current assets − current liabilities
- Current assets: cash and bank, trade receivables (money customers owe you), inventory (raw material, WIP and finished goods) and short-term advances.
- Current liabilities: trade payables (money you owe vendors), short-term borrowings such as cash credit, and statutory dues and other expenses payable.
Positive working capital means short-term assets cover short-term dues. Too little is a cash crunch waiting to happen. Too much usually means cash is sitting idle in stock or with customers.
Working capital ratio
Current ratio = current assets ÷ current liabilities
A ratio between about 1.2 and 2 is often seen as comfortable for a manufacturer, but the right level depends on the industry and how quickly stock and receivables turn into cash. Banks look at it closely when setting cash credit limits.
The working capital cycle in days
The working capital cycle (or cash conversion cycle) shows how many days cash is tied up, from paying for material to collecting from the customer:
Cycle = inventory days + receivable days − payable days
A manufacturer with annual sales of ₹12 crore and material and production cost of ₹9 crore:
| Item | Balance (₹ lakh) | Formula | Days |
|---|---|---|---|
| Inventory | 150 | 150 ÷ 900 × 365 | 61 |
| Trade receivables | 200 | 200 ÷ 1,200 × 365 | 61 |
| Trade payables | 100 | 100 ÷ 900 × 365 | 41 |
| Working capital cycle | 61 + 61 − 41 | 81 |
Each rupee spent on material comes back about 81 days later. Cutting the cycle by 20 days frees roughly 20 days of costs: about ₹49 lakh (900 ÷ 365 × 20) in this business, without borrowing a rupee.
How to free up working capital
Inventory
- Set reorder levels from real consumption, and stop buying slow movers.
- Find and clear dead stock: items with no movement in 6 to 12 months.
- Buy against the production plan, not on habit. See what is MRP.
Receivables
- Invoice the day goods are dispatched.
- Review receivables ageing every week and follow up before due dates.
- Set credit limits per customer and hold new orders for accounts that are overdue.
Payables
- Negotiate credit terms that match how long your own cycle takes.
- Pay on the due date, not earlier, unless there is an early-payment discount worth taking.
Watching working capital in DotOne
DotOne puts the three working capital levers in one place: stock value by item and warehouse in inventory, customer outstanding and receivables ageing, and vendor payables by due date in accounting, built from live sales, purchase and stock data, with the books in DotOne or synced to Tally. For how working capital shows up in your accounts, see what is a cash flow statement.