Working capital cycle: why profit does not pay the bills

The business that grew itself into trouble

A common story among small manufacturers: orders are up, the profit and loss statement shows a healthy year, and the owner is still ringing the bank manager for a higher cash credit limit. Nothing is wrong with the profit. The problem is that profit and cash arrive on different dates.

Our guide on running a small business by the numbers introduces the cash conversion cycle as one of five checks. This post works through it on one business, line by line, and shows why growth makes the gap wider rather than narrower.

A worked example: an auto-parts maker in Pune

This is an illustration with assumed numbers. A small unit machines brackets and fasteners for tier-1 suppliers to the car makers. Its year looks like this:

Three day counts turn those balances into time. The working capital calculator uses the same formulas.

The unit pays for its steel in about 30 days. It then holds that steel, in one form or another, for 61 days, and waits 73 more for the customer to pay. For roughly 104 days every rupee is out of the business and not yet back. In balance-sheet terms, ₹75 lakh + ₹120 lakh − ₹37 lakh = ₹1.58 crore is tied up in running the factory.

Add ₹10 lakh of cash on the asset side, and on the liability side the ₹37 lakh of payables, a ₹90 lakh cash credit drawn from the bank and ₹13 lakh of other dues. The current ratio is 205 ÷ 140 = 1.46. Strip out inventory and the quick ratio is 0.93, which means the unit could not meet its short-term dues from cash and receivables alone.

Why growth eats the cash

Now a customer offers 30% more volume. Sales go from ₹6 crore to ₹7.8 crore, and if nothing else changes, inventory, receivables and payables all grow by 30% too. The net working capital rises from ₹1.58 crore to about ₹2.05 crore, an extra ₹47.4 lakh.

Profit at 6% on the bigger sales is ₹46.8 lakh. So the entire year's profit, and a little more, goes into steel on the shelf and invoices in the post. That is before the owner draws a rupee, before any new machine is bought, before tax is paid on the profit that never turned into cash. This is how a business with a full order book runs out of money: the faster it grows, the more cash it needs up front.

The gap also has a carrying cost. If the whole ₹1.58 crore were funded by cash credit at an assumed 11% a year, interest would be about ₹17.4 lakh a year, close to half the profit.

What each day is worth

Each day of receivables here is worth ₹600 lakh ÷ 365 = ₹1.64 lakh. Each day of inventory or payables is worth ₹450 lakh ÷ 365 = ₹1.23 lakh. Those two numbers turn vague goals into rupees:

All three together free more than the whole 30% expansion needs.

The levers, in order of ease

1. Collect faster. Chase invoices on a fixed weekly day, not when the account runs dry. If your unit is a micro or small enterprise registered on Udyam, the MSMED Act caps buyer payment terms at 45 days and charges interest on later payments; unpaid dues can be filed on the government's MSME Samadhaan portal. TReDS invoice-discounting platforms turn approved invoices from large buyers into cash at a discount.
2. Hold less stock. Smaller, more frequent steel orders, and fewer finished parts made "just in case". Slow-moving stock also hides losses.
3. Pay suppliers later, by agreement. Negotiate 45 days rather than simply paying late. A steel distributor who is paid late raises prices, and the saving disappears.
4. Price the credit. A customer who wants 90 days is asking for a loan. Put its cost in the quote, using the profit margin calculator to see what the extra days do to the margin.

Pitfalls

• Year-end balances flatter or frighten. Use averages of the monthly balances if you have them. A big March dispatch inflates receivables for that one day.
• GST credit stuck with the tax department is working capital too. If a supplier's invoice does not show up in your GSTR-2B, the credit you counted on is cash you must find. See the GST input tax credit calculator.
• A high current ratio is not always good. Above about 3, stock is often not moving or cash is idle.
• Do not park the cash credit buffer in a savings account. Money set aside for a slow month can sit in a liquid fund; the median Direct Growth liquid fund returned 6.5% over the year to 9 October 2026, for example HDFC Liquid Fund at 6.5% and SBI Liquid Fund at 6.5%. That is still below an 11% cash credit rate, so reduce the drawn balance first when you can. An overnight fund is the other option for money needed within days.

When the bank reviews the limit, it will also check whether operating income covers the loan repayments; run your numbers through the DSCR calculator before that meeting. The break-even calculator tells you the volume you must sell, and this one tells you how much cash it takes to get there. A business funded by investors rather than a bank asks the same question through the burn rate calculator.

This post is for education only. The example uses assumed balances and an assumed interest rate; fund returns are past returns as of 9 October 2026 and do not indicate future returns. None of this is a recommendation to buy any fund.