Every business needs some cash on hand to run its day-to-day work. Paying workers, buying stock, handling transport, paying electricity bills, all of that needs money. The money used for these regular, daily needs is called working capital. If cash gets stuck, even for a few days, problems start—orders slow down, and payments get delayed. Sometimes, owners have to borrow at short notice just to cover basic costs. This is something most small and mid-size businesses in India deal with all the time. Customers may take longer to pay. GST refunds don’t always come on time. Suppliers might ask for advance payments. But rent, salaries, and electricity bills? Those don’t wait. That’s why managing working capital is so important. It’s not just about accounting or finance, it’s about making sure the business runs smoothly, without too many money gaps in between.
Different businesses handle this in different ways. Some play it safe and keep extra cash as a buffer. Some take short-term loans to fill the gap. Some try to match their income and expenses as closely as possible. These are all called working capital management approaches.
What is Working Capital Management?
Working capital management simply means handling the money that comes in and goes out in the short term. It’s about making sure the business has enough cash to run daily operations without falling short. That includes managing how much money is tied up in stock, how long customers take to pay, and how soon suppliers need to be paid.
In real life, working capital management shows up in small everyday choices. For example, deciding whether to give a buyer 15 days to pay or ask for full payment upfront. Or checking whether to buy extra inventory this month because prices might go up next month. Or figuring out if cash is enough to pay salaries on time without dipping into an overdraft. It’s about knowing where money is stuck, where it’s coming from, and whether it’ll cover what’s due. It’s about keeping that balance so the business keeps moving smoothly.
When working capital is managed well, bills get paid on time, staff are relaxed, and suppliers trust the business. When it’s mismanaged, cash runs dry at the worst moments, even if the business is technically doing well on paper.
In short, working capital management is just a smart, ongoing way to control the money that keeps the business running every day.
Types of Working Capital
Not all working capital is the same. It depends on why it’s needed, how long it stays in the business, and how it’s used. Knowing the different types helps a business owner manage funds better, especially when things get tight.
1. Permanent Working Capital
This is the minimum amount of working capital a business needs to operate smoothly throughout the year. It covers regular costs like staff salaries, electricity bills, basic inventory, and routine supplies.
Even if there’s no growth or special demand, this portion stays fixed. For example, a bakery might always need ₹1.5 lakh every month for ingredients, salaries, and rent, which is its permanent working capital.
2. Temporary Working Capital
This type comes into play during specific periods, peak seasons, large orders, or sudden demand spikes. It’s not needed all the time, but when it is, it helps keep operations running smoothly.
Think of a stationery wholesaler in Lucknow before the school reopening season. They may need extra stock and staff, which means extra cash. That short-term extra is temporary working capital.
3. Gross Working Capital
Gross working capital means the total of all current assets, including cash in hand, money receivable from customers, raw material stock, finished goods, and even short-term investments. It gives a snapshot of all the short-term resources the business currently holds.
4. Net Working Capital
Net working capital is the difference between current assets and current liabilities.
Net Working Capital = Current Assets – Current Liabilities
If the number is positive, it indicates the business has more current assets than liabilities—a good sign of short-term financial health.. If it’s negative, it could mean payments are due before the business collects enough money to cover them.
Principles of Working Capital Management
Managing working capital isn’t about big finance terms. It’s just about running things in a way that money doesn’t run short when it’s needed most.
1. Balance inflows and outflows
If customers take a month to pay but suppliers want money in 10 days, that mismatch can cause significant cash flow issues. It’s important to know when money is expected to come in and when it needs to go out. If there’s always a mismatch, there will always be tension.
2. Don’t hold more stock than needed
Buying stock in bulk feels safe, especially if prices are low. But if inventory doesn’t move quickly, that cash remains tied up. And when it’s time to pay salaries or rent, that blocked cash can’t help. It’s better to buy what’s needed based on real demand, even if it costs a little more.
3. Collect dues on time
One of the most common problems is customers not paying on time. It happens everywhere. But letting payments slide for too long puts pressure on daily cash. Even a simple reminder call or a fixed credit period like 15–20 days can make a big difference.
4. Use credit wisely
Sometimes, working capital can be financed through short-term loans or bank credit. That’s normal. But over-borrowing brings stress. Interest adds up. At the same time, avoiding loans completely when cash is tight also slows business down. TThe key is to borrow exactly what’s needed – no more, no less.
5. Always keep a small buffer
Unexpected things happen. A delayed payment, a sudden repair, or an urgent order. Keeping a small amount aside, even if it’s not much, can give breathing space. It’s like having a backup in case something goes off track.
These aren’t rules from a textbook. Just practical habits that help make sure there’s enough cash to keep the business moving. Over time, most experienced business owners build their rhythm. But keeping these points in mind can help avoid many common money crunches.
Approaches to Working Capital Management
Every business manages working capital a bit differently. Some play it safe, some take more risks, and some try to strike a balance. These ways of managing funds are called approaches to working capital management. It mostly depends on how much risk the business is okay with and how steady its cash flow is.
There are three main approaches used by most businesses:
1. Hedging Approach (Also Called Matching Approach)
This one is about balance. Businesses try to match their cash inflows and outflows based on timing. So, short-term needs (like seasonal stock) are funded by short-term loans or credit, and long-term needs (like core stock or machinery) are covered by long-term funds.
For example, a medical distributor in Nagpur may take a short-term bank loan for a bulk consignment of medicines needed just for 2 months, and use long-term capital for his regular stock and infrastructure. It’s a safe and logical approach, but it needs careful cash flow planning.
2. Conservative Approach
This is for businesses that prefer low risk. They try to fund even short-term needs using long-term money. That way, there’s less pressure to repay quickly, even if sales slow down for a bit.
A small toy manufacturer might use a long-term business loan or his capital to fund not just his machines and setup, but even his raw materials and stock. It’s safer, but he might pay higher interest or keep more idle money. This approach gives peace of mind but may reduce profits.
3. Aggressive Approach
This one is the risk-taker. Businesses using this approach try to use short-term funds, even for some long-term needs. It reduces interest costs but can create a cash crunch if collections are delayed.
For instance, a clothing trader in Surat might buy all her seasonal stock using credit from suppliers or short-term bank limits. If sales get delayed, she might struggle to repay on time. This approach can improve returns but needs very good control over payments and receivables.
There’s no one-size-fits-all here. Many Indian businesses mix and match these approaches based on the season, cash flow, or how confident they feel about collections.
Methods of Managing Working Capital
Managing working capital isn’t just about having cash in hand, it’s about keeping the daily money cycle running smoothly. For most Indian small and mid-size businesses, this comes down to simple, everyday practices that decide whether the business stays stable or struggles to pay bills.
Here are some of the most commonly used methods to manage working capital effectively:
1. Inventory Control
Too much stock blocks money. Too little means lost sales. Managing inventory means finding that middle ground, keeping just enough materials or products so the business can run smoothly without locking up funds.
Many businesses in India still track stock manually or loosely. But even basic digital tracking (like using simple software or spreadsheets) can help reduce waste and avoid overbuying.
2. Speeding Up Payments from Customers
Late payments are one of the biggest reasons businesses fall short on working capital. Making it easier for customers to pay through UPI, online transfers, or payment reminders can improve cash flow without needing outside funds.
Some businesses also offer small discounts for early payments or use invoice financing when customers delay too long.
3. Delaying Non-Urgent Payments to Suppliers
If a business has 30 days to pay a vendor but pays on day 10, that’s 20 days of cash gone unnecessarily early. Delaying payments within agreed terms is a smart method of holding on to cash without hurting vendor relationships.
However, it’s important not to delay beyond deadlines, which can damage trust.
4. Planning Cash Flow Weekly or Monthly
Basic cash flow planning helps predict when money will come in and when payments are due. Even if it’s a manually maintained chart, having visibility into the next 30 to 60 days can prevent panic borrowing or delayed salaries.
5. Avoiding Overtrading
Sometimes, businesses grow too fast without enough working capital to support it. Taking on more orders than the cash flow allows can create shortfalls. Managing working capital also means knowing when to pause and plan growth instead of rushing into every opportunity.
6. Reducing Credit Periods
Some Indian businesses are now trying to reduce credit periods to 30 or even 15 days, especially for repeat customers with a stable payment history, though standard B2B terms still commonly range between 30–60 days.
In the end, these methods are not one-size-fits-all. A manufacturing unit in Gujarat will manage working capital very differently from a textile trader in Surat or a small café in Indore. But the goal is always the same: keep the daily flow of money under control so the business doesn’t run dry when it’s needed most.
Cash Management in Working Capital
Cash is the most liquid part of working capital. It’s also the part that needs the most care. If a business runs out of cash, even for a few days, everything can come to a halt, salaries get delayed, supplier payments are missed, or daily operations slow down. So, managing cash properly is a key part of working capital management.
Why Cash Management Matters
- Helps pay bills on time
- Keeps daily operations running without disruption
- Builds trust with suppliers and staff
- Reduces the need to borrow in a hurry
Even if a business shows profit on paper, poor cash handling can cause serious trouble. That’s why many small and mid-size businesses try to keep a close watch on where cash is coming from and where it’s going.
Common Ways to Manage Cash Better
Track Daily Inflows and Outflows
Keeping a daily note of cash received and cash spent helps avoid surprises. A simple cash register or Excel sheet is often enough.
Avoid Too Much Idle Cash
Holding excess cash means the money isn’t actively contributing to business growth.. Some of it can be used to clear dues or buy stock in bulk at a discount.
Time Outflows with Inflows
If payments from customers usually come after 15 days, plan supplier payments accordingly. Try not to commit before expected inflows.
Keep a Small Buffer
Unplanned expenses happen machine repair, sudden transport charges, or festival bonuses. Keeping a small cash reserve helps avoid panic.
Use Banking Facilities Wisely
Overdrafts and working capital limits can be used when needed, but they should be managed carefully. Today, banks often evaluate working capital limits based on GST filings, turnover, and past cash flow patterns. Relying on them too often can lead to interest pressure.
Good cash management doesn’t need complicated tools. Even basic habits like weekly cash reviews and planning big payments go a long way in keeping working capital healthy.
How Working Capital Can Be Financed
Not every business has enough profit or spare cash to cover daily needs. That’s where financing comes in. Working capital can be arranged through different sources, some internal, some borrowed. For Indian small and mid-size businesses, knowing where to get this short-term support can help avoid delays, penalties, or production stops.
Common ways working capital can be financed:
1. Internal Sources
These are funds generated from within the business itself.
- Retained profits: Some businesses allocate a portion of earnings as reserves, which can be reinvested into operations if they are liquid and not already earmarked for future use. These retained profits can be used for daily expenses without borrowing.
- Reducing inventory or receivables: If a business sells off slow-moving stock or collects pending payments faster, it can free up funds for operations.
- Tighter cost control: Cutting back on unnecessary spending (like overtime, wastage, or low-value purchases) can release more working capital.
2. Short-Term Bank Loans
Banks offer loans specifically designed for working capital needs. These can be for a few months to a year, depending on the arrangement. Most businesses use this option to manage seasonal demands or bridge temporary cash flow gaps.
Keep in mind, banks will look at credit score, financial statements, and sometimes even GST returns before giving out such loans.
3. Overdraft or Cash Credit Facility
In an overdraft or cash credit facility, a business can withdraw funds beyond its account balance, up to a pre-approved limit. Interest is charged only on the amount used. While both are short-term credit tools, overdraft is usually linked to the current account, whereas cash credit is typically secured against inventory or receivables.
It works well when cash flow is unpredictable. Many Indian SMEs in trading and manufacturing prefer this facility, especially when customer payments come in late.
4. Trade Credit from Suppliers
Sometimes, vendors allow businesses to buy raw materials or goods on credit and pay after 15, 30, or even 60 days. This is a common and practical form of working capital financing.
Maintaining good relationships with suppliers is key here. Consistent orders and timely payments help build that trust.
5. Invoice Financing
If customer invoices are unpaid but confirmed, some NBFCs or fintech companies offer short-term funds against them. This allows the business to access funds in advance while awaiting client payments.
This method has gained traction in India, especially among B2B businesses and service providers.
6. Government Schemes and MSME Loans
Government schemes such as SIDBI’s working capital loans, MUDRA loans (up to ₹10 lakh), and state-level MSME programs offer working capital support, particularly to micro and small businesses. Eligibility may depend on business turnover, credit history, and sector. These are designed for smaller businesses with limited access to formal credit.
Although the process might involve paperwork, the rates and repayment terms are often better than those of private lenders.
Financing working capital is not just about taking loans. It’s about choosing the right mix that suits the business cycle, repayment capacity, and customer behavior. A cautious, well-planned approach to financing can keep the business running without piling up unnecessary debt.
Common Working Capital Challenges for Indian SMBs
Managing working capital might sound simple in theory, but for many Indian small and mid-size businesses, it often feels like walking a tightrope. The day-to-day pressures, irregular cash flow, and rising costs make it harder to keep money moving smoothly.
Here are some of the common working capital problems Indian businesses face:
1. Delayed Payments from Customers
This is one of the biggest pain points. Many businesses sell goods or services on credit, but the money doesn’t always come in on time. Some clients delay payments for weeks, sometimes even months.
It blocks cash that could’ve been used to pay salaries, vendors, or buy stock. In industries like textiles, construction, and wholesale trading, this is a regular headache.
2. Limited Access to Credit
Not all small businesses get easy loans or overdrafts from banks. Even those that do often face high interest rates, strict eligibility rules, or long approval times.
This forces many business owners to rely on informal borrowing, like borrowing from friends, local financiers, or dipping into personal savings.
3. Uncontrolled Inventory
Sometimes, money gets stuck in unsold stock. Whether it’s seasonal items, over-ordering, or slow sales, holding too much inventory eats into working capital. And in cases where stock is perishable or goes out of trend (like fashion or electronics), it leads to losses.
4. GST Refund Delays
Businesses dealing with exports or high-input GST credits often face delays in refunds. This holds back cash that could otherwise be used in operations.
Even with digital filings and online tracking, many small exporters or traders report pending refunds that stretch for weeks or more.
5. High Operating Costs
Rent, electricity, logistics, and salaries take up a big chunk of cash. If income slows down for a few months but expenses remain constant, the pressure builds quickly.
Without proper planning, many SMBs face cash flow constraints during lean seasons or post-festive demand drops.
6. Poor Financial Planning
Some business owners don’t regularly track their incoming and outgoing cash. Without a proper cash flow plan, it’s easy to miss warning signs like a drop in collections or a spike in unpaid bills.
This leads to last-minute borrowing or sudden shortfalls.
7. Dependence on a Few Large Clients
Relying heavily on just one or two customers is risky. If they delay payments, reduce order volume, or stop business altogether, the working capital dries up instantly. Many B2B companies face this situation when big buyers hold back payments during market downturns.
Conclusion
Working capital is not just an accounting term. It’s the money that keeps a business running every single day. From paying staff to buying stock to covering bills, it all comes down to how well the working capital is managed.
For small and mid-size businesses in India, this becomes even more important. Cash flow can be unpredictable. Payments often get delayed. Expenses don’t wait. That’s why understanding working capital management and choosing the right approach is not optional. It’s necessary.
Whether a business follows a conservative path or takes an aggressive route, whether it uses bank loans or supplier credit, the goal is always the same: to keep the business stable and ready for the next day.
Good working capital management doesn’t mean being perfect. It just means being aware, prepared, and smart about daily finances. Even simple steps like tracking payments, keeping inventory in check, or planning cash flow can make a big difference.
In the end, managing working capital isn’t about grand strategies – it’s about consistent small decisions that help the business survive today and grow tomorrow.
FAQs
1. What do you mean by working capital management?
It means handling the money a business needs for daily activities, like paying for goods, staff, and other short-term expenses. The goal is to make sure there’s always enough cash to keep the business running smoothly.
2. Why is working capital so important for small businesses?
Because small businesses often don’t have a big cash reserve. If payments get delayed or costs go up suddenly, even a few days of cash shortage can create problems. Good working capital management helps avoid that.
3. What are the main approaches to working capital management?
There are three:
- Conservative – low risk, but may block extra funds
- Aggressive – high risk, but lower costs
- Hedging (or matching) – balances both based on asset life
Each business can choose what fits best based on how stable their cash flow is.
4. How can working capital be financed?
It can be funded through:
- Business profits
- Owner’s funds
- Bank loans and overdrafts
- Supplier credit
- Invoice financing
Many businesses use a mix of these depending on the situation.
5. What causes working capital problems in Indian SMBs?
- Late customer payments
- Limited access to loans
- High inventory or input costs
- Poor cash planning
- Seasonal demand fluctuations
Even one of these can affect the entire cash cycle.
6. How much working capital is enough?
There’s no fixed number. It depends on the business type, sales cycle, and cost structure. But most experts suggest keeping enough to run operations smoothly for at least 1 to 2 months without fresh cash inflow.
7. What’s the difference between types, methods, and approaches of working capital?
- Types refer to the nature (like permanent vs temporary)
- Approaches are the strategies to manage it (like conservative or aggressive)
Methods are how it’s practically handled, tracking cash, managing stock, collecting dues, etc.
8. Does GST or other compliance affect working capital?
Yes. Delayed input tax credit refunds, especially for exporters, and compliance-related filings can block working capital. For some businesses, advance tax payments may also add to short-term cash flow strain. Many businesses face cash flow issues during compliance-heavy months.
