Many Indian MSMEs show a healthy profit in their annual accounts and still run their overdraft at the limit every month. This is not a contradiction. Profit is recorded when you sell; cash arrives when your customer pays. In between, money sits in stock and in receivables.
The three numbers that explain the gap
- Receivable days = trade receivables ÷ sales × 365. How long customers take to pay you.
- Inventory days = inventory ÷ cost of goods sold × 365. How long goods sit before they are sold.
- Payable days = trade payables ÷ purchases × 365. How long you take to pay suppliers.
Your cash conversion cycle is receivable days + inventory days − payable days. It is the number of days each rupee is locked in the business before it comes back as cash.
A worked example
A distributor with ₹6 crore annual sales, ₹4.8 crore cost of goods, ₹1.2 crore receivables, ₹80 lakh stock and ₹50 lakh payables has receivable days of 73, inventory days of 61 and payable days of 38 (using cost of goods as a proxy for purchases). The cycle is 96 days. If sales grow 20% and the cycle stays at 96 days, the business needs roughly 20% more working capital — before it earns a rupee of extra profit.
Three levers that release cash
- Collect faster: send statements weekly, call the top ten overdue customers first, and stop fresh supplies to accounts beyond an agreed limit. A 10-day cut in receivable days on ₹6 crore of sales releases about ₹16 lakh.
- Hold less stock: identify items with no movement in 90 days and stop reordering them. Reorder levels should follow actual sales, not habit.
- Pay on terms, not early: if suppliers give 45 days, schedule payment on day 45 — but respect the 45-day limit for registered micro and small suppliers (see our note on Section 43B(h)).
How to start this week
Take last year's trial balance and this year's to date. Calculate the three numbers for both. If the cycle got longer, find which component moved. The working-capital calculator in our Tools section does the arithmetic for you, and Bebaak Cash does it from an uploaded trial balance with ageing files.
