Working Capital Management

Working capital comprises current assets (trade receivables, inventory, cash and bank balances, short-term loans and advances) less current liabilities (trade payables, short-term borrowings, other current liabilities), as disclosed under Schedule III to the Companies Act 2013. The cash conversion cycle — days sales outstanding plus days inventory outstanding minus days payable outstanding — is the single most actionable metric for a trading or manufacturing business. For listed companies, SEBI's Listing Obligations and Disclosure Requirements Regulations 2015 (Regulation 34 read with Schedule V) require disclosure of the current ratio and debtor turnover ratio in the annual report. A deteriorating current ratio below 1.2 or a receivables cycle exceeding your credit terms by more than 15 days is an early warning requiring immediate intervention. Our practice benchmarks these ratios against your industry peer group and identifies specific line items to compress.

GST creates a working capital drag because you pay output tax to suppliers and collect input tax credit (ITC) only after filing GSTR-3B, subject to matching with GSTR-2B under Rule 36(4) of the CGST Rules 2017, which restricts provisional ITC to 105% of the matched credit visible in GSTR-2B. For exporters, the lock-up is compounded until a refund is sanctioned under Section 54 of the CGST Act 2017, which has a statutory sanction timeline of 60 days from the date of application (Section 54(7)). Filing GSTR-1 on time and ensuring your suppliers file on time directly determines how quickly GSTR-2B populates and ITC flows through. We review your vendor compliance rate, identify top suppliers causing ITC mismatches, and help structure payment terms to coincide with ITC availability. For capital-intensive businesses, we model the effective interest cost of ITC blockage and compare it against the benefit of early payment discounts.

TReDS is a RBI-regulated electronic platform (authorised under the Payment and Settlement Systems Act 2007 and governed by RBI Master Directions on TReDS dated November 3, 2014, as updated) where MSMEs can discount accepted trade receivables owed by larger corporates. Under Section 7 of the MSMED Act 2006, your enterprise must be a registered MSME — a micro, small, or medium enterprise as per the revised classification thresholds notified on June 1, 2020 (investment up to ₹50 crore and turnover up to ₹250 crore for medium enterprises). The corporate buyer must on-board the same TReDS platform and accept the invoice digitally, after which financiers bid to discount the receivable — effectively converting a 60-90 day debtor into immediate cash at a competitive rate. Ministry of Corporate Affairs notification dated July 2, 2019 mandates specified companies with turnover above ₹500 crore to on-board at least one TReDS platform, giving MSMEs leverage to demand participation. We handle the Udyam Registration prerequisite, TReDS platform selection, and documentation for your first discounting cycle.

Inventory funding structures include cash credit facilities against hypothecation of stock (governed by RBI's Master Circular on Loans and Advances — Statutory and Other Restrictions), bills discounting, channel financing, and supply-chain finance programmes offered by large OEMs. Interest paid on borrowings for business purposes is deductible under Section 37(1) of the Income Tax Act 1961 (and the corresponding provision under Section 30 of the Income Tax Act 2025 for Tax Year 2026-27 onwards), subject to the arm's length condition and thin capitalisation rules under Section 94B of the ITA 1961 if the lender is a non-resident associated enterprise. Inventory must be valued consistently at cost or net realisable value, whichever is lower, per AS 2 (or Ind AS 2 for companies to which Ind AS applies under the Companies (Indian Accounting Standards) Rules 2015), and the valuation method — FIFO or weighted average — directly affects the taxable profit and the collateral value a bank will accept. Pledging inflated inventory to secure higher limits while understating it in the balance sheet constitutes a fraudulent practice under Section 447 of the Companies Act 2013. We map your actual inventory ageing against the drawing power formula your bank uses to identify headroom or shortfall.

Section 15 of the MSMED Act 2006 requires buyers to pay MSME suppliers within the agreed period (maximum 45 days) or, absent a written agreement, within 15 days of acceptance of goods or services. Delayed payment beyond these limits attracts compound interest at three times the bank rate notified by RBI under Section 16 of the MSMED Act 2006, and the outstanding amount must be disclosed in the buyer's audited financial statements per Schedule III to the Companies Act 2013 (as amended October 2018). Filing under MSME Form I (half-yearly return) is mandatory for specified companies under the Companies (Furnishing of Information about Payment to Micro and Small Enterprise Suppliers) Rules 2019. Strategically, extending payable days to non-MSME large suppliers while respecting MSME timelines — and capturing early-payment discounts from suppliers who offer them — typically produces a net positive cash cycle without MSME exposure. We audit your vendor master to flag MSME registrations, model the interest-cost exposure on delayed balances, and redesign your payment calendar accordingly.