Accounting explained
Working Capital: Meaning, Format and Example
Working capital is the money a business needs to keep running day to day: stock on the shelves and credit given to customers, less the credit taken from suppliers. A profitable shop can still run short of cash if too much is tied up here.
The formula
Working capital = current assets − current liabilities. Current assets are stock, debtors, bank and cash; current liabilities are creditors, GST payable and other short-term dues.
| Sri Lakshmi Stores, 31 March 2026 | ₹ |
|---|---|
| Closing stock | 3,30,000 |
| Sundry debtors | 1,20,000 |
| Bank and cash | 1,75,000 |
| Current assets | 6,25,000 |
| Sundry creditors | (1,80,000) |
| GST payable | (25,000) |
| Current liabilities | (2,05,000) |
| Working capital | 4,20,000 |
Current ratio = 6,25,000 ÷ 2,05,000 = 3.05.
The cash cycle in days
| Measure | Calculation | Days |
|---|---|---|
| Stock days | Average stock ₹3,00,000 ÷ COGS ₹37,60,000 × 365 | 29 |
| Debtor days | Debtors ₹1,20,000 ÷ credit sales ₹8,00,000 × 365 | 55 |
| Creditor days | Creditors ₹1,80,000 ÷ purchases ₹38,20,000 × 365 | 17 |
Debtor days are measured on credit sales only, because cash and UPI sales are collected at once.
Reading the example
Goods sit on the shelf for about 29 days. Most sales are cash, but credit customers take about 55 days to pay, while suppliers are paid in about 17. A current ratio of 3 means the store can pay its short-term bills comfortably, but it also means cash is tied up: ₹1,20,000 with customers and ₹3,30,000 on the shelves.
If credit customers paid in 30 days instead of 55, debtors would be about ₹66,000 (8,00,000 × 30 ÷ 365) and roughly ₹54,000 of cash would be freed, without selling a single extra packet.
Ways to free working capital
- Collect udhar on fixed days and stop credit to customers past their limit
- Cut slow-moving stock; reorder fast movers more often in smaller lots
- Negotiate longer credit with suppliers, especially for slow-moving lines
- Take digital payments, which settle within a day or two
- Do not use supplier money for long-term spending such as fixtures
Common mistakes
- Judging the shop's health by bank balance alone
- Paying for shop renovation out of working capital and then running short of stock
- Building stock for a festival with no plan to sell it through
- Ignoring GST payable when counting available cash
- Assuming a high current ratio is always good; very high can mean idle stock
Working capital and GST
GST affects cash in two ways. Tax collected on sales sits in the bank until the 20th of the next month, which helps cash briefly. Tax paid on purchases is recovered only when it appears in GSTR-2B and is set off, so a supplier who files late ties up your cash. For QRMP filers, the monthly PMT-06 payment and the quarterly balance can make cash needs lumpy. Count GST payable as a liability, not as spare money.
Key terms on this page
- Current assets: stock, debtors, bank and cash, expected to turn into cash within a year
- Current liabilities: amounts due within a year, such as creditors and GST payable
- Current ratio: current assets ÷ current liabilities
- Cash conversion cycle: stock days + debtor days − creditor days
- Working-capital limit: a bank facility, such as a cash credit or overdraft, to fund stock and debtors
About the worked example
The examples on our accounting pages follow one shop through one year: Sri Lakshmi Stores, a kirana in Mysuru owned by Ramesh, for the financial year 2025-26. It sold ₹48 lakh of goods (before GST), made a gross profit of ₹10.4 lakh and a net profit of ₹4.7 lakh, and ended the year with a balance sheet total of ₹7.95 lakh. The figures are illustrative but they add up across every page, so you can follow one transaction from the journal to the balance sheet.
How TripleBill handles it
TripleBill shows receivable and payable ageing, stock value and low-stock and dead-stock lists, and the bank and cash balances in one place, which are the working capital levers. The balance sheet gives the totals for any date (Starter and Pro).
General information on bookkeeping, not accounting or tax advice. For your final accounts and filings, consult a chartered accountant.
Last reviewed
Last reviewed: November 2026.
Frequently asked questions
What is working capital?
Current assets minus current liabilities: the funds tied up in running the business day to day.
What is a good current ratio?
There is no single answer. Below 1 is a warning sign; well above 2 can mean idle stock or slow collections. Watch the trend for your own shop.
Is stock part of working capital?
Yes, it is usually the largest current asset of a shop.
How can a profitable shop run out of cash?
When profits are tied up in growing stock and customer credit faster than suppliers extend credit.
What are debtor days?
How long customers take to pay on average: debtors ÷ credit sales × 365.
Is a bank overdraft a current liability?
Yes. It is repayable on demand and reduces working capital.
What is negative working capital?
When current liabilities exceed current assets. Some fast-moving businesses run like this safely, but for a small shop it usually means bills are being paid late.
How much working capital does a new kirana need?
Roughly enough to fund opening stock plus a few weeks of expenses and any credit you plan to give. Work it out from your expected sales, stock days and credit terms.
Does a bank loan improve working capital?
A long-term loan used for working capital increases current assets without a current liability, so yes. A short-term overdraft adds both, so the net figure does not change, though cash in hand rises.
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