Chapter 4 of 8

Working capital: why profitable growth can need cash

Calculate inventory, debtor and creditor days and connect them to the financing of an Indian operating business.

2 min read · Original educational chapter

In this chapter

Profit does not pay the supplier until collected
Use the right denominator for each day measure
Diagnose the reason for a longer cycle
Forecast growth and financing together
Worked example
Common mistakes
Check your understanding
Desk assignment

Profit does not pay the supplier until collected #

A distributor may buy inventory, sell on credit and wait for customers to pay. The supplier can demand payment before the customer does. That timing gap needs financing even if the sale earns a margin.

Operating working capital often focuses on inventory plus trade receivables minus trade payables, with other operating items considered explicitly. It is not the same as every definition of current assets minus current liabilities.

Use the right denominator for each day measure #

Receivable days often use average trade receivables divided by credit revenue times days in the period. Inventory days use cost of goods sold; payable days ideally use purchases, with cost of goods sold sometimes used as a disclosed approximation.

Use average balances where available and state whether the period has 365 days or another length. A year-end balance affected by seasonality can distort a full-year ratio. Cash conversion cycle is inventory days + receivable days − payable days under these conventions.

Diagnose the reason for a longer cycle #

Higher inventory may support a launch, reflect supply precautions or signal unsold stock. Longer receivable days can arise from customer mix, disputed bills or deteriorating collection. The number is a prompt for evidence.

Check ageing, provisions, write-offs, related parties and post-period collection where disclosed. A longer payable period can supply cash temporarily but may strain suppliers or reflect overdue bills.

Forecast growth and financing together #

If revenue doubles with the same working-capital intensity, cash tied up can also rise materially. Include inventory and credit terms in the forecast rather than assuming profit converts immediately to cash.

Stress slower collections and lower inventory realisation. Funding sources have limits and costs. A company can fail a cash test before a long-run growth thesis is proven wrong.

Hypothetical worked example

A fictional cash conversion cycle

Average inventory ₹12 crore and annual cost of goods sold ₹73 crore imply 60 inventory days using 365 days. Average receivables ₹15 crore on ₹109.5 crore credit revenue imply 50 debtor days. Payables ₹8 crore against ₹73 crore purchases imply 40 creditor days.

Cash conversion cycle is 60+50−40 = 70 days. If purchases differ from cost of goods sold, keep the proper purchases denominator rather than silently substituting it.

Common mistakes

Using revenue as the inventory-days denominator without explanation.
Treating all current liabilities as free supplier credit.
Forecasting profit growth without incremental working capital.

Check your understanding

What is the cycle with 60 inventory days, 50 debtor days and 40 creditor days?

Make this chapter useful

Can you defend the reasoning?

Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.

Desk assignment

What to submit

Create a working-capital schedule with denominator definitions, average balances, seasonal caveats and a slower-collection stress.

Use the research ledger for dated evidence, or the module workbooks for calculations. Separate observations, assumptions and interpretation.

Sources and further reading

Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.

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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.