Working Capital Management

Working capital is the lifeblood of operations. A business can be profitable on an accrual basis yet face severe cash stress if its working capital is poorly managed. The key components are trade receivables (money owed by customers), inventory (raw materials, work-in-progress, finished goods), and trade payables (money owed to suppliers). The cash conversion cycle (CCC) = Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) − Days Payable Outstanding (DPO) quantifies how long cash is tied up before being recovered from sales.

India's complex distribution structure — with multi-tier distributor chains in FMCG, pharma, and consumer durables — creates particular challenges. Companies often extended credit to distributors to push volumes, inflating receivables and making DSO a sensitive metric. Asian Paints historically operated with negative working capital (DPO > DSO + DIO), meaning its suppliers effectively financed its operations — a hallmark of superior pricing power.

Inventory management under Ind AS 2 requires valuing inventory at the lower of cost and net realisable value. For manufacturing businesses, the inventory build-up before festive seasons (Q3) and run-down thereafter creates seasonal working capital swings visible in quarterly balance sheets. Excessive inventory relative to sales trends (inventory days rising consistently) was an early warning flag in companies like Manpasand Beverages and Kwality Ltd before accounting irregularities became public.

Trade receivables quality is assessed through debtor days and provisions for bad debts. Ind AS requires the expected credit loss (ECL) model under Ind AS 109 for provisioning receivables, replacing the incurred loss approach. Under ECL, provisions must reflect forward-looking default probabilities, often requiring higher provisioning than the older write-off-only approach, particularly for B2B companies with concentration in stressed customers.

Supply chain financing (reverse factoring) emerged as a widely used working capital tool among Indian corporates. Maruti Suzuki, Bajaj Auto, and large FMCG companies enabled vendor financing programmes, allowing suppliers to receive early payment from banks using the buyer's credit standing. While this extends effective DPO for the buyer, it can introduce off-balance sheet risks if improperly disclosed.