Working capital: meaning, the cash cycle and why startups run short

Working capital equals current assets minus current liabilities. Current assets are things the company expects to turn into cash within a year: stock, receivables (money customers owe) and cash. Current liabilities are bills due within a year, such as payables to suppliers, short-term loans and taxes.

Under Schedule III of the Companies Act, 2013, a company's balance sheet separates these current items from long-term ones, which is how analysts calculate the figure. A positive number means the company can cover near-term bills from near-term assets. A tight or negative number means it leans on suppliers or lenders to stay afloat.

The cash conversion cycle (CCC) counts the days between paying for inputs and getting paid by customers. It equals days of inventory plus days of receivables minus days of payables.

Days of inventory is how long stock sits before it is sold. Days of receivables is how long customers take to pay. Days of payables is how long the company takes to pay suppliers. A shorter cycle means cash comes back sooner. A negative cycle means customers pay before suppliers must be paid, which is common in quick-commerce and online marketplaces.

• Days of inventory: average stock divided by cost of sales, times 365.
• Days of receivables: receivables divided by revenue, times 365.
• Days of payables: payables divided by cost of sales, times 365.
• Cash conversion cycle: inventory days plus receivable days minus payable days.

Growth consumes working capital. To sell more, a company buys more stock, gives more credit and pays more staff before the extra revenue arrives. A profitable business can still run short if sales growth outpaces collections.

A battery-swapping network is a clear case. In the StopDown story on Battery Smart, an existing backer put about ₹98 crore into a Series C round, and working capital is named beside network growth and equipment as a use of the money. Batteries, stations and spares need cash up front, while the revenue comes in small payments over time.

Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 requires a buyer to pay a micro or small supplier within the agreed period, which cannot exceed 45 days, or within 15 days if there is no written agreement. Section 16 sets compound interest on late payment.

Since 1 April 2024, the income-tax law has also disallowed a deduction for amounts owed to micro and small suppliers beyond these limits until they are actually paid. This was section 43B(h) of the old Act. As of November 2026, the Income-tax Act, 2025 carries the same rule under a new section number. For a startup that buys from small vendors, a slower payables cycle is therefore a tax cost as well as a legal one.

Companies shorten the cycle in three ways: sell stock faster, collect from customers sooner and stretch payables within legal limits. A D2C brand may reduce the number of product variants to hold less stock. A business-to-business firm may offer a discount for early payment.

Other tools bring cash forward. Invoice discounting lets a company sell its receivables to a lender at a discount. A working capital loan or cash credit line from a bank covers gaps. Venture debt and NBFC loans are also used by startups that do not want to dilute shares for short-term needs.

Equity is often used for the first stock or the first big customer, while debt suits recurring cycles. If a company raises equity to fund working capital, it is paying a high price for money that returns within months. Many founders prefer bank or NBFC lines for this reason, and many investors ask how much of a round goes to working capital versus growth or product.

Many IPOs list funding of working capital as one of the objects of the issue. The offer document then explains the working capital gap, with figures for stock days, receivable days and payable days for the past few years, and the estimate for the years ahead. The SEBI ICDR rules require the company to justify such a use, and a monitoring agency tracks the money for larger issues.

A reader can use these tables to see whether the cycle is lengthening. Rising receivable days with flat sales are a warning. Falling inventory days with steady sales mean the business is turning stock faster.

Capital expenditure buys long-lived assets such as machines, vehicles, servers and warehouses. Working capital funds short-lived items that turn over within a year. A company can run short of one while holding plenty of the other, and lenders offer separate products for each, such as term loans for assets and cash credit for working capital.

Some businesses collect cash from customers on the day of sale and pay suppliers weeks later. Their payables exceed their stock and receivables, so working capital is negative and the suppliers are in effect funding the business. This helps while sales are growing, because the float grows too.

The model reverses if growth stalls. Payables then fall due without fresh sales to cover them, and the cash that looked free has to be found. Reading the cycle alongside cash balances shows how exposed a company is.

Look at how the company describes the use of funds. A line that says working capital usually means stock, receivables or operating losses, rather than new assets. Look at receivables growth against revenue growth: if receivables grow faster, customers are paying slower. In an IPO filing, working capital requirements often appear as an object of the issue, and the filing shows the days for each part of the cycle.

This guide is general information. Check with an accountant or lawyer about your own payment terms and tax position.

A practical habit is to track the cycle every quarter and compare it with peers in the same sector, since a cycle that is normal for a grocery app would be alarming for an equipment maker.

Founders who watch stock days, receivable days and payable days monthly usually spot a cash squeeze weeks before the bank balance shows it.