the guide
Working capital and the cash conversion cycle
By Shivam Bhandari · Reviewed 31 October 2026 · How we write
Working capital is the money tied up in day-to-day operations: cash, money customers owe you and stock, minus what you owe suppliers and other short-term bills.
The cash conversion cycle shows how many days cash is locked up between paying for inputs and collecting from customers. Growing businesses often run out of cash because this cycle needs funding.
the formula
Working capital = Current assets − Current liabilities · Cash cycle = Debtor days + Inventory days − Creditor days
- · Current ratio = Current assets ÷ Current liabilities; quick ratio excludes inventory.
- · Debtor days = Receivables ÷ Sales × 365; inventory and creditor days use cost of goods sold.
Worked example: a distributor
- Current assets ₹17 lakh (cash ₹3L, receivables ₹8L, stock ₹6L); current liabilities ₹7 lakh.
- Working capital ₹10 lakh; current ratio 2.43; quick ratio 1.57.
- Debtor days ≈ 49, inventory days ≈ 52, creditor days ≈ 43 → cash cycle ≈ 57 days.
Tips
- 1Invoice promptly and follow up on overdue payments.
- 2Reduce slow-moving stock to free cash.
- 3Negotiate longer supplier terms without damaging relationships.
- 4Arrange working capital finance before growth strains cash.
Frequently asked questions
What is a good current ratio?
Around 1.2 to 2 is often considered comfortable, but it varies by industry. Below 1 can signal difficulty paying short-term bills.
What is the cash conversion cycle?
The number of days between paying for inventory and receiving cash from customers: debtor days + inventory days − creditor days.
How can I reduce working capital needs?
Collect faster, hold less stock and pay suppliers on longer terms where possible.
Is negative working capital bad?
Not always — some retailers collect cash before paying suppliers. But for most small businesses it signals cash stress.