Introduction: Tackling Hidden Profit Erosion in Your Business

Strong sales can be deceiving when money is invested in inventory, receivables, or slow payables to suppliers, each of which can quietly drain profits.

For production and physical-product companies, working capital is most crucial for wages, raw materials, inventory, and customer credit. If it fails to flow sufficiently, even a profitable company can experience liquidity squeezes, tension, and suboptimal growth.

Studies in India show a strong correlation between working capital efficiency and corporate profitability. A sample of 366 non-financial Indian firms found that better working capital management is significantly associated with higher profitability. (Source: ResearchGate).

Additionally, Indian manufacturing firms that followed prudent working capital policies tended to achieve better returns on assets. (Source: MDPI)

Thus, Effective working capital management is essential for sustainable business growth.

Why Working Capital Management Matters for Mid-Sized Businesses

Mid-sized firms (₹100 – 500 Cr) typically do not have deep liquidity cushions and are more vulnerable to shocks — supplier delays, changes in demand, and credit crunch. In this scenario, the following may be mentioned:

• Each additional day your inventory remains unsold takes away from available cash to reinvest.
• Delayed receivables become an implicit loan to your customers at your cost.
• Settling suppliers too early depletes reserves & settling too late damages trust and supply security.

• All the above depict negative situations which can damage the health of a business to a large degree.
  
  

Research in Indian manufacturing supports this: companies with tighter working capital cycles report superior profitability.  (Source: aior+1)

Additionally, Indian corporates’ work indicates that companies that maximise their working capital figures (inventory days, receivables days, payable days) perform better than their counterparts.

Briefly speaking, for mid-cap companies, working capital leaks are one of the primary reasons for margin decline and operational vulnerability.

Now, let’s take a closer look at the primary building blocks of Working Capital.

• Inventory comprises anything from raw materials to intermediate goods and end stock. Having too much of it is having your money idle on shelves rather than earning for you. Having too little means you’ll disappoint customers when demand is highest. The key is to forecast demand correctly and have just enough to sustain production and sales.
• Receivables are the funds due to you from customers. Extending credit can boost sales, but each additional day a payment is postponed ties up valuable cash. Thorough follow-up and precise payment terms guarantee that your profits arrive in your account — not simply your invoices.
• Payables are the amount you owe your suppliers, instead. Lengthening payment periods can put cash temporarily back in your pocket, but take it too far, and you risk compromising trust and upsetting supply. Wiser companies develop relationships that accommodate flexibility without burning bridges.
• Cash and cash equivalents represent the safety net — your liquid funds for sudden requirements, surprise opportunities, or economic downturns. It’s liquidity that stabilises your enterprise during market volatility.

Some of the best-performing enterprises in the world have action-oriented practices of optimisation of working capital.

Best Practices for Optimising Working Capital

• Begin with your stock. Apply simple techniques such as ABC or Pareto analysis to identify what’s selling rapidly. Maintain buffer stock only for high-demanding products and remove slow sellers that tie up cash.
• Implement Just-in-Time (JIT) concepts wherever feasible — order raw materials to be delivered just when production is to be undertaken so that money is not idle in warehouses.
• Second, tighten the credit policy without impairing relationships. Set specific payment terms (such as 30–45 days), take partial payments in advance from large clients, and utilise CRM reminders to keep collections on track.
• Conversely, trade more intelligently with suppliers. Match payment terms with your cash receipts — capture early-payment discounts when you are able, and negotiate extended terms when cycles tighten.
  Automate collection and billing in order to prevent delays from manual processes. Cash is accelerated and cleaned up by digital reminders and clear invoicing.
• Monitor your key metrics — DIO, DSO, DPO, and the Cash Conversion Cycle (CCC) — monthly. Even slight changes uncover cash flow pressure before it affects your bottom line.
• Create a cash buffer of 10–15% of working capital to manage seasonal fluctuations or unexpected shocks.
• And lastly, align working capital with your expansion plans. Loose the cycle a bit during expansion if returns warrant it — but remain disciplined. Work closely with suppliers and customers: joint forecasts and stable order cycles can significantly enhance cash visibility.
  
  

Common Pitfalls To Avoid Managing Working Capital

Most mid-sized promoters unconsciously manage working capital as a fixed item—something to “take care of later”—when in reality it fluctuates with each change in sales, product mix, or cycle of credits. The most frequent pitfall is loosening credit too much in the quest for larger sales, converting your own money into free financing for slow payers.

On the other hand, stretching payables too far may provide temporary relief but gradually undermine supplier trust and dependability. A second common mistake is in inflated inventories—products left idling, slowly turning into dead stock that quietly devours margins.

To that, add a failure to plan contingencies in case of seasonal or market shocks, and liquidity stress is inescapable. The issue is not lack of intent but lack of discipline—firms do not connect operating decisions (such as production).

Actionable Takeaways for Promoters & CEOs

• Conduct a 5-customer + 5-product audit
• Verify how long every SKU remains idle and how every important customer pays. Identify leaks.
• Map your CCC
• Compute DIO + DSO – DPO for your enterprise and compare it to industry benchmarks.
• Cut one bad SKU and one bad customer
• Drop the worst-performing SKU and the worst payer customer. Utilise freed-up capital.
• Negotiate realigned terms with one large supplier
• Negotiate extended payables or improved pricing in return for volume commitment.
• Set monthly dashboards and review with leadership
• Utilise working capital metrics in every monthly board or leadership review.
  
  

Conclusion

Working capital management isn’t about managing costs — it’s about maintaining liquidity, facilitating growth, and preserving margins.

For mid-size companies, where capital is constrained and cycles are tight, messing up working capital can transform a profitable opportunity into a cash trap. But optimised well, it becomes a lever that multiplies profitability and stability.

If you can control inventory, receivables, payables, and make your cash never stop moving, your business ceases to be at the mercy of surprises and becomes in control. That’s how working capital stops being a handicap—but a strategic growth engine.

To have a detailed discussion and expert advice on how to implement the above given suggestions, you can connect with us. To know more: Visit: https://make10xhappen.in/