Know Your Cash Cycle: A Practical Guide to Funding the Gap Between Paying and Getting Paid

The Working Capital Imperative

Earlier pieces in this series described a new guarantee on invoice discounting, Budget measures, the state of MSME credit, SIDBI's role and the 45-day payment rule. This guide turns them into steps a business owner can follow. It is our framework. The numbers in examples are invented, and nothing here is advice tailored to your situation.

Step 1: Measure your cash cycle

Three numbers matter. Days of inventory: how long stock sits before it is sold. Days of receivables: how long customers take to pay. Days of payables: how long you take to pay suppliers. The cash cycle is inventory days plus receivable days minus payable days. An invented example: stock stays 30 days, customers pay in 60, and you pay suppliers in 20. The cycle is 70 days, meaning you must fund 70 days of costs before cash returns. If monthly costs are Rs 10 lakh, you need roughly Rs 23 lakh of working capital, since 70 days is a little over two months. Cut receivable days to 40 and the need falls to about Rs 17 lakh.

“Profit is a view of the year; cash is a view of the week.”

Step 2: Shorten the cycle before you borrow

• Collect faster: invoice on the day of delivery, state the due date, remind early, and offer a small discount only if it costs less than borrowing. • Hold less stock: order smaller quantities more often if suppliers allow, and clear slow-moving items. • Negotiate longer supplier terms, but remember that micro and small suppliers have the 45-day limit in their favour, which your own suppliers may rely on.

Step 3: Compare funding options

• Overdraft or cash credit. Flexible and priced on the amount you actually use. Check the review date, the security needed and any charges for unused limits. • Invoice discounting on TReDS. You sell a buyer-accepted invoice for cash now. Cost is the discount rate for the period. Compare it with your overdraft rate on an annual basis. The new guarantee described in FI1 applies only where both buyer and seller are micro or small enterprises as reported. • Guarantee-backed term loans. Government guarantee schemes can allow lending without collateral up to stated limits. The Outlook Business report on the Union Budget for FY26 said the guarantee cover for micro and small enterprises was raised from Rs 5 crore to Rs 10 crore, and that a customised credit card scheme offered up to Rs 5 lakh for Udyam-registered micro enterprises. Confirm the current terms with your bank. • Supplier credit. Cheap if free, but check whether prices are higher for credit. • Equity or quasi-equity. Only for businesses with growth potential, as discussed in FI2.

Step 4: Match funding to purpose

Use short-term borrowing for short-term needs such as stock and receivables, and longer loans for machinery. Funding a machine with an overdraft leaves you exposed when the bank reviews the limit.

Step 5: Prepare a lender-ready file

Keep two or three years of financial statements, GST returns, bank statements, a list of major customers with payment history, a stock statement and a one-page note on the business. Lenders respond to clarity.

Step 6: Plan for the downside

Ask what happens if your largest customer pays 30 days late. Hold a cash buffer equal to at least a few weeks of fixed costs where you can, and agree a standby limit in advance. Borrowing in a crisis is costlier than arranging a facility before one.

Step 7: Watch the total cost

Add interest, processing fees, guarantee fees, insurance and the cost of your own time. Compare quotes on an annual percentage basis.

Common mistakes

Mixing personal and business accounts; ignoring GST and tax payments until the last minute; taking a longer loan than the asset's life; discounting every invoice without checking the cost; and failing to read prepayment terms.

A monthly routine

On the first working day, list all receivables due and payables due for the next 30 days. Compare expected inflows and outflows by week. If a gap appears, act in the first week, not in the last.

A quick self-test

Can you state your cash cycle in days? Do you know your cash balance each Monday? Have you compared at least two funding quotes in the last year? If the answer to any is no, begin there. Editorial framework; general information. Example numbers are invented. Figures on Budget FY26 measures are as reported by Outlook Business (6 Feb 2025). Not financial advice.