The working capital cycle in rupees: current assets, current liabilities and where your cash gets stuck

Most Indian MSMEs that run short of money are not loss-making; their cash is simply parked somewhere other than the bank account — with customers who pay in 90 days, in stock in the godown, in supplier advances and in GST credit waiting to be matched. An owner who can show a ₹36 lakh profit in the income-tax return and still struggle to pay salaries on the 7th has a working capital problem, not a profit problem. This lesson teaches you to see that money in rupees, name every place it gets stuck and read your own balance sheet as a working capital map. It is education, not personalised financial advice; take decisions specific to your business with your CA.

What you need to know

Current assets and current liabilities. Current assets are what will turn into cash within about a year (or one operating cycle): cash and bank balances, trade receivables (debtors), inventory (raw material, work-in-progress, finished goods, traded goods), advances paid to suppliers, GST input tax credit not yet used, TDS deducted by customers and awaiting refund, and prepaid expenses. Current liabilities are what you must pay within about a year: trade payables (creditors), advances received from customers, GST, TDS, PF and ESI payable, salaries and expenses payable, cash credit or overdraft balances, and the portion of term loans due in the next 12 months.

Three definitions you must keep apart.

• Gross working capital = total current assets. It tells you how much money is circulating in the business.
• Net working capital = current assets − current liabilities. It tells you how much of that circulating money is funded by long-term sources (your capital, retained profit, term loans).
• Operating (trade) working capital = trade receivables + inventory − trade payables. This is the part the owner controls every day through credit terms, buying and stock decisions.

The cycle. Cash buys materials or goods; materials become stock; stock is sold, usually on credit, and becomes a debtor; the debtor pays and it is cash again. Each stage takes days, and the money tied up at each stage is roughly daily flow × number of days. If you sell ₹1.5 lakh a day and customers take 60 days, about ₹90 lakh sits with customers at any time. Cut that to 45 days and roughly ₹22.5 lakh (₹1.5 lakh × 15 days) comes back into your account without selling a single extra unit.

Why profit and cash drift apart. Profit is recorded when you invoice; cash arrives when the customer pays. Stock bought this month is an expense in the P&L only when it is sold. And growth consumes cash: if sales rise 30% while credit terms and stock days stay the same, receivables and inventory also rise about 30%, and that increase has to be funded before the extra profit arrives.

Where cash hides in a typical Indian MSME.

• Debtors beyond agreed terms, especially disputed invoices, short payments and retention money in project businesses.
• Slow-moving and dead stock, unprocessed sales returns, samples and rejected goods lying in a corner.
• Advances to suppliers that were never adjusted against bills.
• Input tax credit that is not reflecting in GSTR-2B because a supplier has not filed, and TDS deducted by customers that comes back only after your income-tax return is processed.
• Loans to relatives, sister concerns or the owner shown as "other current assets". These are real money out of the cycle, even if they look like assets.

Quality matters as much as size. ₹10 lakh of debtors under 30 days old is not the same asset as ₹10 lakh over 180 days old, and fast-moving stock is not the same as a design that went out of fashion two Diwalis ago. Always ask how old, not just how much.

Two ratios lenders look at first. Current ratio = current assets ÷ current liabilities. Quick ratio = (current assets − inventory) ÷ current liabilities. In Indian bank appraisal, a current ratio of around 1.33 or higher is a common rule of thumb for working capital borrowers, because it comes from the traditional method of bank lending; your lender's own policy may differ, so confirm with them. A high current ratio can still hide stuck money, which is why you look at ageing next.

Negative working capital is not automatically bad. A supermarket that sells for cash and pays suppliers in 30 days runs on negative operating working capital, and that is healthy. A manufacturer with negative working capital because it has stopped paying suppliers is in trouble. The sign alone does not tell you which one you are.

Step-by-step method

1. Export your latest balance sheet and trial balance from Tally, Zoho Books or Busy, or ask your accountant for the March and latest month-end versions.
2. List every current asset line with its rupee value. Split inventory into raw material, work-in-progress and finished or traded goods if your books allow.
3. List every current liability line. Separate bank borrowings (CC/OD, current portion of term loans) from trade and statutory liabilities.
4. Calculate gross, net and operating working capital, plus the current and quick ratios.
5. For debtors, pull the ageing report and total the amounts in 0–30, 31–60, 61–90, 91–180 and over-180-day buckets.
6. For stock, get an item-wise report with last sale or movement date and total the value that has not moved in 90, 180 and 365 days.
7. Review advances to suppliers, GST ledgers, TDS receivable and "loans and advances" for anything older than six months or not tied to trade.
8. Add up the "stuck" amounts — overdue debtors, non-moving stock, stale advances, blocked credit — and compare that total to your bank overdraft.
9. Write one sentence per stuck amount stating why it is stuck and who in your team can move it.

Common mistakes

• Treating a comfortable current ratio as proof of healthy working capital without checking the age of debtors and stock.
• Counting the overdraft balance as "our money" and the sanctioned limit as available cash, instead of seeing it as borrowed funding for the cycle.
• Leaving loans to family members or a sister concern inside current assets, which inflates working capital that will never come back in the normal course of trade.
• Valuing old stock at purchase cost in your own review when it can only be sold at a discount; for decisions, use a realistic selling value.
• Looking only at the March balance sheet, which may be dressed up for the year-end, instead of a normal month-end.

Ask the AI Business Tutor

• "I run a [type of business] in [city] with annual sales of about ₹[amount]. My current assets are: cash ₹[ ], debtors ₹[ ] (of which over 90 days ₹[ ]), inventory ₹[ ] (of which not moved in 180 days ₹[ ]), other current assets ₹[ ]. My current liabilities are: creditors ₹[ ], statutory dues ₹[ ], overdraft ₹[ ]. Calculate my net and operating working capital and current ratio, tell me where my cash is most stuck, and suggest three questions I should ask my accountant."