A business can be profitable on paper and still struggle to pay suppliers on time. The reason is usually not profitability — it is timing. Money moves through the operating cycle at different speeds, and the gap between paying out and collecting in has to be funded by someone.
The four stages of the operating cycle
- Purchase – raw material or trading stock is bought, often on credit from suppliers.
- Produce or deliver – goods are manufactured or services are delivered; stock sits in the factory or warehouse.
- Invoice – the customer is billed.
- Collect – payment arrives after the agreed credit period — 30, 60, 90 days or more.
The time between paying for inputs and receiving cash from customers is the cash-conversion cycle. The money needed to bridge that period is your working-capital requirement.
Measuring the gap in days
Three ratios tell most of the story:
- Inventory days = (Average inventory ÷ Cost of goods sold) × 365
- Receivable (debtor) days = (Average receivables ÷ Revenue) × 365
- Payable (creditor) days = (Average payables ÷ Purchases) × 365
Cash-conversion cycle = Inventory days + Receivable days – Payable days.
For example, a distributor with 45 inventory days, 60 receivable days and 30 payable days has a 75-day cycle. Every rupee of daily cost is tied up for 75 days before it returns as cash.
Why growth makes the gap bigger
Growth is the most common — and least expected — cause of working-capital stress. A larger order means more raw material bought upfront, more stock in process and more money waiting with customers. If the cycle stays at 75 days and sales double, the working capital tied up roughly doubles too. Businesses that plan for growth in revenue but not in working capital often find themselves short exactly when they are busiest.
Early warning signs of working-capital pressure
- Supplier payments regularly slipping beyond agreed terms
- Rising overdue receivables or concentration in one or two large customers
- Inventory building up faster than sales
- Working-capital limits used at or near the maximum for long periods
- Using short-term funds to pay for long-term assets
Practical levers before you borrow
Finance is one tool, but not the only one. Review whether you can tighten credit terms with new customers, follow up overdue invoices systematically, negotiate longer supplier credit, reduce slow-moving stock, or align purchases more closely with confirmed orders. Improving the cycle by even 10 days can release meaningful cash.
How working-capital finance should be structured
A sound working-capital facility should reflect the actual operating cycle — not simply provide a fixed amount without reference to business activity. Depending on the business, that may mean finance linked to inventory, eligible receivables, supplier purchases or confirmed orders. Seasonal businesses may need a structure that recognises peaks in procurement or collection.
Explore our Working Capital Solutions or share your requirement for a preliminary discussion.
