Working capital: the money between buying and being paid
Work out how much money your business needs tied up just to keep running, and how to borrow it.
6 min read
Every business has money that is not lost and not spent, but not available either. It is sitting on shelves as stock, or waiting in customers' pockets as unpaid invoices. That money is working capital, and running short of it is how a business that sells well still cannot pay its rent.
What it is, in one sentence
Working capital is the money you need to keep the business running between paying for things and being paid for them.
A tailoring unit buys cloth, pays its karigars, finishes the order, delivers it, and is paid a month later. From the day the cloth was bought to the day the customer paid, the business carried that cost itself. Multiply that by every order in progress and you have its working capital.
The cycle
Follow one rupee round the business:
| Step | Your money is… |
|---|---|
| You buy stock or materials | spent, if you pay the supplier now |
| It sits until it is used | on the shelf |
| You make or sell it | in the goods |
| The customer has not paid yet | owed to you |
| The customer pays | back in your bank account |
The longer that loop takes, the more money it needs. Anything that shortens it — selling stock faster, getting paid sooner, paying suppliers later on agreed terms — frees money without earning a rupee more.
Working out how much you need
You do not need a formula to get a useful answer. Add up, on an ordinary month:
- the value of stock and materials you usually hold
- plus what customers usually owe you at any one time
- minus what you usually owe suppliers at any one time
What is left is roughly the money tied up in running the business.
An example, with made-up numbers. A shop usually holds ₹3,00,000 of stock, is owed ₹1,00,000 by customers on credit, and owes its suppliers ₹1,50,000. Its working capital is ₹3,00,000 + ₹1,00,000 − ₹1,50,000 = ₹2,50,000. If it doubles its sales without changing those habits, it needs roughly twice that.
That last line is the trap. Growth needs working capital in proportion, and it needs it before the extra sales pay.
Borrowing for it
Banks lend for working capital differently from how they lend for a machine:
- Cash credit or overdraft. A limit you can draw on and repay as money comes in, paying interest only on what you use. Suited to a business whose needs rise and fall through the year.
- Working-capital term loan. A fixed amount, repaid in instalments. Simpler, but you pay interest on all of it from day one.
- Scheme-backed loans. MUDRA loans can be used for working capital as well as equipment, and a CGTMSE guarantee can stand in for collateral. The scheme check says which you qualify for.
The bank will size the limit from your stock, what customers owe you and your bank statements — which is another reason to keep the business's money in the business's account.
Do not use working-capital money to buy equipment or pay for a fit-out. It is meant to come back round the cycle. Spent on something that will not turn back into cash soon, it leaves the business short exactly when the next big order arrives.
Needing less of it
Before borrowing, see what you can free up:
- Ask for an advance on large or custom orders.
- Invoice on the day you deliver, and follow up on the due date.
- Order stock more often, in smaller amounts, where your suppliers allow it.
- Clear slow-moving stock, even at a smaller margin.
The funding report below looks at your business and works out which loans and schemes fit your working-capital need, and what each lender will ask you for.