Working capital: the money stuck between buying and being paid
A growing business can run out of cash while every sale makes a profit. The reason is working capital, the money that sits in stock and unpaid bills. This lesson measures it in days, lets you move the days, and reads Titan's and Info Edge's very different cycles.
- Level
- Beginner
- Reading time
- About 23 minutes
- Know this first
- Cash vs profit
By the end you will be able to:
- work out receivable, inventory and payable days from a balance sheet and an income statement
- add them into a cash cycle and say how much money the cycle ties up
- explain why growth uses cash even when every sale is profitable
- tell a business that is funded by its customers and suppliers from one that funds them
The money stuck in the middle
Imagine Meena's stationery shop wins a big order from a group of schools. To fill it she must buy paper and notebooks first. The schools will pay her sixty days after delivery. Her supplier wants payment in thirty. The order is profitable, but for a month or more she has paid out money and received nothing, and the shelves and the schools' unpaid invoice are holding it.
The lesson on cash vs profit showed that profit and cash differ, and the lesson on how the three statements connect showed where the difference sits on the balance sheet. This lesson turns that difference into something you can measure and compare: how many days of selling, buying and waiting a business is carrying at any moment. The measure is the same for a shop and for a listed company, which is why it is one of the most used tools in reading accounts.
Three clocks
Each of the three balances is converted into days by asking how many days of the relevant flow it represents. A receivable that equals thirty days of sales means customers are taking, on average, about thirty days to pay.
| Measure | Worked out as | The question it answers |
|---|---|---|
| Receivable days | Trade receivables ÷ revenue × 365 | How long do customers take to pay? |
| Inventory days | Inventories ÷ cost of goods × 365 | How long does stock sit before it is sold? |
| Payable days | Trade payables ÷ cost of goods × 365 | How long does the business take to pay suppliers? |
| Cash cycle | Receivable days + inventory days − payable days | How many days is the business's own money tied up? |
Receivables are measured against revenue because that is what customers owe for. Inventories and payables are measured against the cost of goods because that is what the stock cost and what suppliers are owed for. The cycle then adds the first two, the days money waits to come back, and subtracts the third, the days suppliers wait for theirs.
Move the days
Below is a trading business that sells ₹36,50,000 of goods a year, which is ₹10,000 a day, and whose goods cost 60% of the price, ₹6,000 a day. Change how long customers take to pay, how long stock sits and how long suppliers wait. The ledger shows the money each setting ties up. The last control asks what happens if sales grow and the days stay as they are.
Customers owe ₹3,00,000 and the shelves hold ₹2,70,000, while suppliers are owed ₹1,80,000. That leaves ₹3,90,000 of the owner's and lenders' money tied up, a cycle of 45 days. If sales grow 20% and the days stay the same, the business needs about ₹78,000 more cash just to carry the bigger balances, before it has kept any profit.
Try three experiments. First, set the growth to 50% and leave the days alone: the extra cash needed is half of the money already tied up, even though nothing about the business has got worse. Growth is paid for before it is earned. Second, pull payable days to zero and watch the tied-up figure jump. A business that pays its suppliers on the spot funds all of its stock and all of its customers' credit itself. Third, push payable days above the other two combined, and the tied-up figure goes negative. Now suppliers are funding the business, and growth releases cash instead of using it. Businesses that are paid by their customers before they have to pay their own suppliers can run that way.
A real company: Titan
Titan's balance sheet and income statement hold everything needed for the three clocks. Each figure below is a line of its audited standalone accounts, in ₹ crore. Cost of goods is the sum of three lines in its expenses: materials consumed, purchases of stock in trade and the change in inventories.
| ₹ crore, and days | FY2023-24 | FY2022-23 |
|---|---|---|
| Revenue from operations | 47,114 | 38,270 |
| Cost of goods (materials, stock bought for sale, and the change in stock) | 36,942 | 29,046 |
| Trade receivables at 31 March | 937 | 908 |
| Inventories at 31 March | 16,874 | 14,952 |
| Trade payables at 31 March | 943 | 965 |
| Receivable days | 7.3 | 8.7 |
| Inventory days | 166.7 | 187.9 |
| Payable days | 9.3 | 12.1 |
| Cash cycle, in days | 164.7 | 184.4 |
Titan's trade receivables equal only about 7.3 days of its revenue, and its trade payables about 9.3 days of its cost of goods. Those two almost cancel. The cycle is decided by the third clock: the shelves hold 166.7 days of cost, and the cash cycle for FY2023-24 was 164.7 days, a little over five months. Jewellery is an inventory business. A shop has to hold gold, stones and watches in front of the customer before it can sell any of them.
The cycle was shorter than the 184.4 days of the year before, an improvement of 19.8 days, and nearly all of it came from inventory days, which fell by 21.2. That deserves a second look, because the amount of stock went up. Inventories rose by ₹1,922 crore, or 12.9%, to ₹16,874 crore. But the cost of goods rose by 27.2%, faster than the stock. Days measure the pace at which stock is turned over, not how much of it there is. Titan sold more, and its shelves grew less than its sales.
The cash flow statement shows the same stock from the other side. Inventories absorbed ₹1,922 crore of operating cash in FY2023-24 and ₹2,165 crore a year before, and the first figure is exactly the change on the balance sheet. As an illustration, had Titan held FY2023-24's cost of goods against the FY2022-23 inventory days, its stock would have been about ₹2,143 crore higher. That is the cash the faster turn did not need to tie up. It is arithmetic on published figures, not a number Titan reports.
| ₹ crore, brackets = cash used | FY2023-24 | FY2022-23 |
|---|---|---|
| Trade receivables | (22) | (414) |
| Inventories | (1,922) | (2,165) |
| Trade payables | (24) | (89) |
| Gold on loan | (152) | (71) |
| All other working capital lines | 174 | 877 |
| Working capital changes, total | (1,946) | (1,862) |
Taken together, working capital used ₹1,946 crore of Titan's cash in FY2023-24 and ₹1,862 crore in FY2022-23. In both years the inventories line was the largest part by far. This is the arithmetic behind the lesson on cash vs profit’s observation that Titan's operating cash is a good deal smaller than its profit.
Gold on loan, and why classification matters
One line in the table above needs care. Titan's balance sheet shows gold on loan of ₹4,938 crore as a current liability at 31 March 2024, against ₹5,090 crore a year earlier. Titan's own cash flow statement lists the ₹152 crore fall in this item among the working capital changes, so in its operating section it behaves like a supplier balance.
Both readings are defensible, and they give different pictures. If gold on loan is a supplier-like balance, it belongs in the payables clock, and Titan's stock is largely funded by credit. If it is debt, the stock is funded by a lender, and the company has money tied up in the cycle that it pays for with borrowing. As a rough illustration only, take the gold on loan away from the inventories: the inventory days would be 117.9 for FY2023-24 and 123.9 for the year before, not 166.7 and 187.9. That is not a measure Titan publishes, and the loan is not tied to specific stock in the accounts. It shows how much the answer moves with the classification.
The lesson for any reader is practical. When two companies' cycles are compared, check where each puts items of this kind. The same question comes up in the lesson on the cash flow statement, where interest could sit in operating or financing activity, and it is why this site keeps naming the line a number comes from.
A business with no stock
Info Edge runs online services, and its accounts have no inventories line to measure. Its balance sheet shows trade receivables of ₹70.82 million against revenue of ₹23,809.58 million, which is 1.09 days of revenue in FY2023-24 and 1.52 days the year before. Customers owe it almost nothing at any one time.
Its cash flow statement lists nine working capital lines, set out below. Positive figures are cash coming in.
| ₹ million, brackets = cash used | FY2023-24 | FY2022-23 |
|---|---|---|
| Trade receivables | 29.22 | (48.94) |
| Other non-current financial assets | (12.43) | 28.18 |
| Other current financial assets | (31.13) | (80.65) |
| Other non-current assets | 14.52 | (10.04) |
| Other current assets | (98.35) | (144.75) |
| Trade payables | (27.75) | (233.50) |
| Current provisions | 264.53 | 69.66 |
| Other non-current liabilities | 7.18 | 5.25 |
| Other current liabilities | 1,234.14 | 2,102.64 |
| Working capital changes, total | 1,379.93 | 1,687.85 |
The direction is the opposite of Titan's. Working capital released ₹1,379.93 million of cash in FY2023-24 and ₹1,687.85 million in FY2022-23, where Titan's absorbed it. The release came almost entirely from one line, the increase in other current liabilities: ₹1,234.14 million of the ₹1,379.93 million in FY2023-24, and ₹2,102.64 million against a total of ₹1,687.85 million in FY2022-23, where the other lines together used cash. The balance sheet shows other current liabilities of ₹12,135.38 million at 31 March 2024, up from ₹10,902.16 million, without saying what they are made of. The notes to the accounts break it down, and this lesson does not open them, so it does not say what the line contains. What the statements show is how working capital behaves in a business like this: it adds to the cash it earns instead of eating it.
Two firms, then: one that must keep a large, slow-moving stock in front of customers, and one whose balance sheet has no stock and whose customers pay almost at once. Neither is better run for that reason. The clocks tell you what the business has to fund, and the rest of the accounts say how it chose to fund it.
The cash cycle at three global companies
The cash cycle counts how many days pass between paying for what a business needs and collecting from its customers. It is the days customers take to pay, plus the days stock sits unsold, less the days the company takes to pay its own suppliers. The table works it out for Apple, Microsoft and Toyota from their latest year-end balance sheets. A negative number means the company collects from customers before it has to pay its suppliers.
| Latest year, days (year-end balances) | Days of sales in receivables | Days of cost of sales in inventory | Days of cost of sales in payables | Cash cycle |
|---|---|---|---|---|
| Apple | 34.9 | 9.4 | 115.4 | −71.1 |
| Microsoft | 90.6 | 3.9 | 115.2 | −20.7 |
| Toyota | 28.0 | 43.6 | 52.5 | 19.1 |
Year-end balances are used for simplicity. Apple's receivables are its trade receivables and exclude vendor non-trade receivables. Toyota's receivables exclude the loans of its financial services arm, and its cost of sales includes the cost of that arm. A year-end balance can differ from the year's average, so treat the days as a guide to the pattern, not a precise measure.
Apple's cash cycle is negative by 71.1 days. Customers pay within about 34.9 days and inventory sells in about 9.4 days, while Apple takes about 115.4 days to pay suppliers. Its $69,860 million of accounts payable is large against a cost of sales of $220,960 million. In effect, suppliers finance a large part of Apple's operations for months.
Three different models of working capital
Apple: suppliers fund the business. The negative cycle means growth frees cash, and a slowdown does the reverse. When sales fall, payables shrink faster than receivables and the cash drains out. This is a real feature of the model and the reason that Apple's working capital swung from a $3,651 million inflow in one year to a $25,000 million outflow in the next.
Microsoft: slow collection, almost no inventory. Receivables take about 90.6 days of sales, much longer than at the other two, and inventory is only about 3.9 days of cost of sales, because it sells services and software rather than goods. Payables give about 115.2 days, so the cycle is still negative, at 20.7 days. Year-end balances can overstate the typical receivables of a company that bills heavily at the end of its fiscal year, which ends on 30 June, so this figure deserves a second look in the quarterly statements.
Toyota: the traditional manufacturer. Inventory takes about 43.6 days, customers take about 28.0 days and suppliers are paid in about 52.5 days, giving a positive cycle of 19.1 days. Toyota has to fund a stock of vehicles and parts before it is sold. Its finance arm sits outside this calculation, because those receivables are loans that run for years and are not part of day-to-day working capital.
Why the accounting system changes the numbers
Inventory days depend on how inventory is valued. IFRS prohibits the last-in, first-out method (LIFO), while US GAAP allows it. In a period of rising prices a company using LIFO reports lower inventory on its balance sheet, and so shorter inventory days, than one using first-in, first-out would. IFRS also requires that a write-down of inventory be reversed if its value recovers, up to the original cost, while US GAAP forbids reversal. Two businesses with identical stock can therefore show different cycles because of the rulebook alone. When comparing companies in different countries, read the inventory note first to see which cost method the company uses.
Common mistakes
Calling a shorter cycle better without asking how it was shortened
Paying suppliers late shortens the cycle, but it can cost goodwill and early-payment discounts. Cutting stock too far can mean empty shelves and lost sales. A shorter cycle is good when the business has become more efficient, and not when it has borrowed time from its suppliers or its customers.
Confusing the rupee amount with the days
Titan's inventories rose and its inventory days fell, in the same year. Always ask whether a balance grew faster or slower than the flow it supports.
Using revenue for every clock
Stock and supplier balances relate to what goods cost, not to what they sold for. Dividing inventories by revenue understates the days.
Comparing days across industries
A jeweller, a software firm and a vegetable seller have different natural cycles. Compare a company with its own past years and with close rivals.
Treating the year-end balance as typical
A business with a busy festival season can hold far more stock at 31 March than in June. Closing days show one day in the year, and they can mislead when the business is seasonal.
Try it yourself
1. A company has revenue of ₹73 lakh for the year and owes trade receivables of ₹6 lakh at the year's end. What are its receivable days?
Show the working
6 ÷ 73 × 365 = 30 days. Customers take about a month to pay.
2. The same company's cost of goods is ₹43.8 lakh, its inventories are ₹9 lakh and its trade payables are ₹3.6 lakh. Find its inventory days, payable days, cash cycle and the money tied up in the cycle.
Show the working
Inventory days are 9 ÷ 43.8 × 365 = 75. Payable days are 3.6 ÷ 43.8 × 365 = 30. The cycle is 30 + 75 − 30 = 75 days. The money tied up is receivables 6 + inventories 9 − payables 3.6 = ₹11.4 lakh.
3. If that company grows its sales by 25% and the days stay the same, how much more cash does it need to carry the balances?
Show the working
Each balance grows by 25%, so the money tied up grows by 25% of ₹11.4 lakh, which is ₹2.85 lakh. The company has to find that before the extra sales have produced any profit.
4. Titan's inventories rose by ₹1,922 crore in FY2023-24, yet its inventory days fell. How can both be true?
Show the working
Inventory days compare the stock with the cost of goods sold. Inventories grew by 12.9%, but the cost of goods grew by 27.2%. The stock grew more slowly than the flow behind it, so each rupee of stock was turned over faster, and the days fell from 187.9 to 166.7.
Where this is used
- A lender sets a working capital loan limit by looking at how much money the cycle ties up, and how that would change if sales grew.
- A finance team tracks receivable days every month, because a creeping rise shows customers paying slowly before it shows up in any profit measure.
- An analyst compares a company's cycle with its rivals' and with its own earlier years to see whether it is becoming more or less efficient.
- A founder plans for growth by working out how much cash an order will need before the customer's payment arrives.
Key terms
- Working capital
- In this lesson, trade receivables plus inventories less trade payables: the money tied up in running the trade.
- Trade receivables
- Money customers owe for goods or services already delivered.
- Inventories
- Stock held for sale, including raw materials and unfinished goods.
- Trade payables
- Money the business owes its suppliers for goods and services received.
- Cost of goods
- What the goods sold during the year cost the business. For Titan here: materials, stock in trade and the change in inventories.
- Receivable days
- Receivables as a number of days of revenue.
- Inventory days
- Inventories as a number of days of cost of goods.
- Payable days
- Payables as a number of days of cost of goods.
- Cash cycle
- Receivable days plus inventory days less payable days: the days a business's own money is tied up.
Questions people ask
Is a shorter cash cycle always better?
No. It is better when the business has become more efficient, such as holding less unsold stock or collecting faster. It is worse when it comes from squeezing suppliers, who may respond by tightening their terms, or from keeping too little stock to meet demand.
Can the cycle be negative?
Yes. If suppliers are owed more than customers owe and the shelves hold together, as in the third experiment above, other people's money funds the business. Growth then releases cash. It only works while suppliers are willing to wait.
Why do the days on a stock-market website differ from these?
Websites use different formulas. Some use average balances, some divide stock by revenue instead of cost of goods, and some treat items such as gold on loan differently. The formulas in this lesson are stated in full above, so you can repeat them from the filings.
How is this different from the working capital on the balance sheet?
The balance sheet version is all current assets less all current liabilities, which includes cash, short-term investments and short-term borrowings. This lesson isolates the trade items. The lesson on the fund flow statement uses the wider version to build a fund flow statement.
Sources and review
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of the balance sheet and income statement figures, including gold on loan.
- Titan Company Limited, audited results with statements of cash flows for the year ended 31 March 2024, filed with BSE. Source of the working capital lines of the cash flow statement.
- Info Edge (India) Limited, audited standalone financial statements, Q4 FY24. Source of the balance sheet, income statement and every cash flow line.
- CRISIL Ratings, rating rationale for Titan Company Limited, September 2024, for the description of gold on loan as a funding source and its treatment as short-term debt in credit analysis.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
- Deloitte, Roadmap: IFRS and US GAAP comparison, 1.4 Inventories, for LIFO, cost formulas and the reversal of write-downs.
How the numbers were checked: the cost of goods, receivable, inventory and payable figures are rebuilt from printed lines, and the Titan cash flow inventory line was compared with the change on the balance sheet and matches. Every working capital line for Info Edge was added up and agrees with the printed subtotal, and the total reconciles to cash from operations. The calculator was tested against separate arithmetic across thousands of slider combinations.