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Introduction A business can be profitable on paper and still run out of money. This is not a theoretical possibility it is one of the most common reasons Indian SMEs face financial distress or fail entirely. Working capital - the money available to run day-to-day operations is the lifeblood of an
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FAQ :
Working capital is the money available for day-to-day operations. Poor management of working capital is a primary reason why profitable Indian SMEs face financial distress or fail, even with healthy sales.
The working capital cycle, or cash conversion cycle, measures how long it takes for invested operational funds to return as cash. It's calculated as Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding.
Common issues include slow debtor collection, excessive inventory, over-reliance on bank overdrafts, poor payables management, and a lack of planning for seasonal revenue fluctuations.
To improve debtor management, SMEs should establish clear credit policies, conduct creditworthiness checks, send invoices promptly, and follow up systematically on outstanding payments.
Available financing options include Cash Credit/Overdraft facilities, Invoice Discounting/Factoring, MSME loans under government schemes, and Supply Chain Finance programs.
SMEs should treat working capital metrics like Debtor Days, Inventory Days, Creditor Days, and the Cash Conversion Cycle as monthly Key Performance Indicators (KPIs) to proactively identify and address potential stress.
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