The Working Capital Cycle: Where Your Cash Is Actually Trapped

The calculation

Inventory days is average inventory divided by cost of goods sold, times days in the period. Receivable days is the DSO calculation. Payable days is average trade payables divided by purchases, times days.

Add the first two, subtract the third. The result is how many days of operations you must fund yourself. A services business with no inventory and quick collection can run a short or even negative cycle; a manufacturer importing raw materials and selling on credit can easily run one hundred and twenty days.

The three levers, and their limits

1. Inventory: the most controllable, and the one with the clearest operational trade-off against stockouts and production runs.

2. Receivables: controllable through terms, invoicing discipline and collections cadence, but constrained by what the market will accept.

3. Payables: the tempting lever, and the one with a statutory ceiling. Stretching payment to micro and small suppliers beyond forty-five days triggers Section 16 interest and the Section 43B(h) disallowance.

That last constraint has changed the calculus materially since 2024. Extending payables was once free; for MSE suppliers it now costs interest at three times the bank rate plus a deferred tax deduction.

What releasing cash is worth

Take a business with one crore rupees a month of revenue and a ninety-day cycle. Each day removed from the cycle releases roughly three and a third lakh rupees permanently. Ten days releases a third of a crore.

That is a one-time release rather than recurring income, but unlike borrowing it carries no interest and no repayment. For most small businesses it is the cheapest capital available.

Where to look first

Start with the ageing tail rather than the average. A handful of very old receivables usually contributes more to the number than a general slowness, and they are also the ones most likely to be disputes nobody has resolved.

Then look at the gap between invoice date and supply date. Delays in raising invoices are invisible in DSO, because the clock only starts when the invoice does.

Frequently asked questions

### What is a good cash conversion cycle?

Shorter is better, and negative is excellent, but the benchmark is your own history and your sector. Retail and food service often run negative cycles because customers pay immediately and suppliers extend credit; manufacturing rarely does.

### Is stretching supplier payments a good way to fund growth?

It is the most expensive lever if your suppliers are registered micro or small enterprises. Beyond the Section 15 limit you incur compound interest at three times the RBI bank rate, the interest is not deductible, and the purchase itself is disallowed until paid.

### Does delaying invoicing show up in DSO?

No, which is why DSO alone can look healthy while cash is slow. Measure the gap between supply and invoice separately — it is a pure self-inflicted delay and usually the quickest thing to fix.