| Overview: The working capital cycle measures how long your business takes to convert investments into cash. Understanding and optimising this cycle helps improve cash flow, reduce funding needs, and boost profitability. This guide covers calculation methods, optimisation strategies, and funding solutions for Indian businesses. |
Understanding the Fundamentals of Working Capital Cycle
The working capital cycle represents the lifeblood of your business operations. Think of it as the time your money spends on a journey — from purchasing inventory to collecting cash from customers. For Indian businesses, this cycle often extends longer than desired. This creates cash flow challenges that can stifle growth.
According to RBI data, Indian MSMEs face working capital shortages worth ₹20-25 lakh crore annually. The working capital cycle directly impacts your ability to pay suppliers, invest in growth, and maintain smooth operations. By understanding this cycle, you can identify bottlenecks and implement strategies to free up cash faster.
Breaking Down the Working Capital Cycle Components
Understanding each component helps businesses manage cash flow efficiently and maintain smooth operations.
1. Inventory Days (Days Inventory Outstanding – DIO)
Your inventory days represent how long stock sits before being sold. This includes raw materials, work-in-progress, and finished goods. The formula is:
DIO = (Average Inventory ÷ Cost of Goods Sold) × 365
Consider a Mumbai textile manufacturer with ₹40 lakh average inventory and ₹1.6 crore annual COGS:
DIO = (₹40,00,000 ÷ ₹1,60,00,000) × 365 = 91 days
2. Receivables Days (Days Sales Outstanding – DSO)
DSO measures how quickly you collect payments from customers. The calculation is:
DSO = (Average Accounts Receivable ÷ Net Revenue) × 365
Using the same manufacturer with ₹25 lakh average receivables and ₹1.2 crore annual revenue:
DSO = (₹25,00,000 ÷ ₹1,20,00,000) × 365 = 76 days
3. Payables Days (Days Payable Outstanding – DPO)
DPO shows how long you take to pay suppliers, calculated as:
DPO = (Average Accounts Payable ÷ Cost of Goods Sold) × 365
With ₹20 lakh average payables:
DPO = (₹20,00,000 ÷ ₹1,60,00,000) × 365 = 46 days
Calculating Your Complete Working Capital Cycle
The working capital cycle formula combines all three components:
Working Capital Cycle = DIO + DSO – DPO
From our textile manufacturer example:
Working Capital Cycle = 91 + 76 – 46 = 121 days
This means the business waits 121 days to convert inventory investments into cash. During this period, the company needs alternative funding sources to maintain operations.
| Component | Days | Impact on Cash Flow |
| Inventory Days (DIO) | 91 | Cash tied up in stock |
| Receivables Days (DSO) | 76 | Waiting for customer payments |
| Payables Days (DPO) | 46 | Grace period from suppliers |
| Total Cycle | 121 | Net cash conversion time |
Industry Benchmarks for Working Capital Cycle
Different sectors have varying cycle lengths based on their business models:
| Industry | Typical Cycle (Days) | Key Factors |
| FMCG Retail | 30-60 | Fast inventory turnover, cash sales |
| Manufacturing | 75-180 | Credit sales, high inventory needs |
| IT Services | 35-65 | Low inventory, focus on receivables |
| Trading Business | 45-120 | Depends on credit terms and inventory |
Optimisation Strategies for Indian Businesses
Effective strategies help Indian businesses maximise working capital efficiency and drive growth.
1. Reducing Inventory Days
Minimising inventory days frees up cash and improves overall working capital.
Just-in-Time (JIT) Approach: Order inventory based on actual demand rather than forecasts. A Chennai auto parts supplier reduced their working capital cycle from 145 to 98 days by implementing JIT principles, freeing up ₹15 lakh in cash.
ABC Analysis: Categorise inventory by value and importance:
- A items: High-value, tight control
- B items: Moderate control
- C items: Simple control systems
2. Accelerating Receivables Collection
Speeding up receivables ensures steady cash flow and healthier working capital.
Digital Invoice Management: Implement automated invoicing and payment reminders. Companies using digital invoicing report 25-30% faster collections.
Credit Policy Optimisation:
- Verify customer creditworthiness using CIBIL scores
- Set clear payment terms (30/45/60 days)
- Offer early payment discounts (2/10 net 30)
- Regular follow-up schedules
3. Extending Payables Period
Negotiate longer payment terms with suppliers without damaging relationships. Consider:
- Volume-based extended terms
- Early payment discounts when cash flow allows
- Supplier financing arrangements
A business loan offered by Airtel Finance can provide the working capital needed during cycle optimisation, offering up to ₹75 lakh with flexible repayment terms.
| Pro Tip: Offering a 2% discount for payments within 10 days instead of 30 days can significantly improve your working capital cycle while maintaining customer relationships. |
Real-World Success Story
A practical example showing how effective working capital management drives business success.
Case Study: Priya Enterprises, a Delhi-based electronics distributor, faced a 156-day working capital cycle that strained their growth plans.
Initial Situation:
- Inventory Days: 95
- Receivables Days: 89
- Payables Days: 28
- Working Capital Cycle: 156 days
Optimisation Strategy:
- Implemented inventory management software (reduced DIO to 72 days)
- Digitised invoicing process (reduced DSO to 65 days)
- Negotiated 45-day supplier terms (increased DPO to 45 days)
Result: New working capital cycle = 72 + 65 – 45 = 92 days
The 64-day reduction freed up ₹28 lakh in operating cash, enabling expansion into two new markets.
