Core working capital

The textbook definition of working capital is current assets minus current liabilities. That number quietly mixes two unrelated things: the money stuck in running the business (unsold stock, bills customers have not paid) and items about how the business is financed (cash in the bank, the current portion of a loan).

Core working capital keeps only the first. It answers one question: how much of the owners' money is sitting in the operating cycle at any moment, unavailable for anything else?

Follow a rupee through the cycle. The company pays for raw material, holds it as inventory, converts it, sells on 60 days' credit, and finally collects. Cash leaves at the start and returns at the end. The supplier funds part of that gap by granting credit of its own; whatever is left, the company funds itself.

The consequence catches people out: core working capital grows with sales. A business running at 20% of sales will absorb another Rs 20 of cash for every Rs 100 of new revenue. Fast growth therefore consumes cash even while profit rises — which is how a profitable company runs out of money.

Core working capital = Inventory + Trade receivables − Trade payables

Expressed in days, the same idea is the cash conversion cycle:

Cash conversion cycle = Inventory days + Receivable days − Payable days

An auto components maker, at year end:

Core working capital is 360 ÷ 1,800 = 20% of sales, and the cycle runs at roughly 73 days (49 days of inventory + 63 of receivables − 39 of payables).

Now grow revenue 25%, to Rs 2,250 crore. At the same intensity, core working capital rises to Rs 450 crore — an extra Rs 90 crore of cash absorbed, against a profit for the year of Rs 110 crore.

Growth consumed 82% of the year's profit before a single rupee of capital expenditure. The P&L looks excellent. The bank balance does not.

Chapter 8 (Company Analysis – Financial Analysis) treats working capital under both liquidity and efficiency. Expect to be handed a balance sheet and asked to compute it, or to compare two companies' working capital management. The examinable insight is the one above — that a growing company absorbs cash — and it is also the standard explanation of why EBITDA is not cash flow.

• It is not current assets minus current liabilities. Cash, short-term investments and short-term borrowings are deliberately excluded — they are financing, not trading.
• Negative core working capital is a strength, not distress. Retailers and e-commerce collect from customers before paying suppliers, so the suppliers fund the business. Read the sign before reading it as a problem.
• Rising core working capital on flat sales is the real warning — it means stock is not moving or debtors are not paying.
• Strictly, inventory and payable days are computed on cost of goods sold and receivable days on sales. NISM questions often simplify everything to sales; use whatever the question gives you.