BankPulse Academy

What is the working capital cycle? (Operating cycle or cash conversion cycle)

The working capital cycle is the number of days between paying for raw material and collecting cash from the customer.

Written 07 September 2026. For bankers in India.

In one line

The working capital cycle counts the days from paying a supplier to collecting cash from a customer. A longer cycle means more of the firm's money is stuck in stock and unpaid bills.

Why it matters to you

Sizing the limit. The cycle tells you how much cash credit a firm really needs.
Reading accounts. Stock days, debtor days and creditor days show how a business runs in three numbers.
Renewals. A cycle that stretches from 70 to 120 days is an early warning of trouble.
Drawing power. Stock statements, margins and drawing power follow the same three parts as the cycle.
Getting it wrong. Dividing by the wrong figure, or counting old unpaid debtors, can overstate a limit by lakhs.

How it works

Four plain words first.

Stock (inventory): raw material, work in progress and finished goods lying with the firm.
Debtors (receivables, book debts): customers who bought on credit and have not yet paid.
Creditors (payables): suppliers whom the firm has not yet paid.
Cash credit: a running loan account, secured on stock and debtors, used for day-to-day needs.

The cycle in words: days the stock sits, plus days customers take to pay, minus days taken to pay suppliers.

In symbols: cycle = inventory days + receivable days - payable days.

Compute each part from the last balance sheet and profit and loss account. Use 365 days.

Inventory days = stock ÷ cost of sales × 365.
Receivable days = debtors ÷ credit sales × 365.
Payable days = creditors ÷ credit purchases × 365.
Cycle = inventory days + receivable days - payable days.

Cost of sales is what the goods sold cost the firm. For a trader it is opening stock plus purchases minus closing stock. For a maker it also includes factory wages and power. Divide stock by cost, not by sales, because stock is valued at cost.

Credit sales are sales where the customer pays later. If the accounts do not split cash and credit sales, use total sales and note it. Credit purchases are purchases paid for later. If purchases are not shown, use cost of sales in their place and note it.

For a manufacturer, split inventory days into three parts and add them. Raw material days divide by raw material consumed. Work in progress days divide by cost of production. Finished goods days divide by cost of sales.

Why a longer cycle needs more money. Every day of the cycle is a day the firm has paid out and not yet been paid. Money tied up is roughly cost per day multiplied by cycle days. Double the cycle and you roughly double the money needed.

A negative cycle. A grocery shop sells for cash today and pays its supplier after 45 days. Its cycle can fall below zero. The supplier is funding the shop. This is normal in retail, restaurants and some services. Such a firm needs little or no bank working capital. Watch one risk: if sales drop, the supplier bills still fall due.

Seasonal businesses. A sugar mill buys most of its cane in three or four months and sells sugar all year. Stock and the cycle swing with the season. A year-end balance sheet drawn in the low-stock month will mislead you. Ask for a month-by-month cash budget. Fix a higher limit for the busy months and a lower one for the rest.

Two names for two numbers. Some books call inventory days plus receivable days the operating cycle. They call the figure after deducting payable days the cash conversion cycle or net operating cycle. Ask which one a report uses before comparing numbers.

Worked examples

Example 1: a trader in Indore

EXAMPLE. From the audited accounts for the last year: sales Rs 4,38,00,000, all on credit. Cost of sales Rs 3,65,00,000. Purchases are not shown separately, so we take them as equal to cost of sales. Year-end stock Rs 60,00,000. Debtors Rs 48,00,000. Creditors Rs 30,00,000.

Cost of sales per day = Rs 3,65,00,000 ÷ 365 = Rs 1,00,000.
Inventory days = 60,00,000 ÷ 3,65,00,000 × 365 = 60 days.
Receivable days = 48,00,000 ÷ 4,38,00,000 × 365 = 40 days.
Payable days = 30,00,000 ÷ 3,65,00,000 × 365 = 30 days.
Cycle = 60 + 40 - 30 = 70 days.

Money tied up: stock plus debtors is Rs 1.08 crore. Less creditors of Rs 30 lakh, the gap is Rs 78 lakh. The bank and the trader's own funds together must fill this gap.

BANK PRACTICE add-on: drawing power. Drawing power is the most the borrower may draw today. It is fixed from the latest stock statement after deducting a margin. Margin is the share of stock and debtors the bank will not fund.

Paid stock = stock less creditors = Rs 60 lakh - Rs 30 lakh = Rs 30 lakh.
Stock after a 25 per cent margin = Rs 22,50,000.
Debtors after a 40 per cent margin = Rs 28,80,000.
Drawing power = Rs 22,50,000 + Rs 28,80,000 = Rs 51,30,000.

Some banks deduct creditors from debtors instead of from stock. Margins differ from bank to bank. Your bank's policy decides.

Example 2: an MSME maker with projected turnover of Rs 4 crore

EXAMPLE. An MSME (Micro, Small and Medium Enterprise) unit projects sales of Rs 4,00,00,000 next year. Its fund-based working capital limit from all banks is under Rs 5 crore. Fund-based means money actually lent, not a guarantee. So the turnover method applies.

Turnover method:

Working capital need = 25 per cent of Rs 4 crore = Rs 1,00,00,000.
Borrower's own share = 5 per cent of turnover = Rs 20,00,000.
Bank limit = 20 per cent of turnover = Rs 80,00,000.
Check: Rs 20 lakh + Rs 80 lakh = Rs 1 crore.

Now the operating cycle method for the same unit. Take these figures from its projections. Raw material consumed Rs 2.4 crore. Cost of production Rs 3.2 crore. Cost of sales Rs 3.4 crore. Credit purchases Rs 2.4 crore. Holding periods are the days each item stays. From past accounts: raw material 60 days, work in progress 15 days, finished goods 30 days. Debtors 60 days. Creditors 30 days.

Raw material = 2,40,00,000 × 60 ÷ 365 = Rs 39,45,205.
Work in progress = 3,20,00,000 × 15 ÷ 365 = Rs 13,15,068.
Finished goods = 3,40,00,000 × 30 ÷ 365 = Rs 27,94,521.
Debtors = 4,00,00,000 × 60 ÷ 365 = Rs 65,75,342.
Total current assets = Rs 1,46,30,137.
Creditors = 2,40,00,000 × 30 ÷ 365 = Rs 19,72,603.
Working capital gap = Rs 1,26,57,534.
Cycle = 60 + 15 + 30 + 60 - 30 = 135 days.

Current assets here means stock plus debtors. BANK PRACTICE: many banks ask the borrower to fund 25 per cent of current assets. This share must come from the borrower's own capital or long-term funds. That is Rs 36,57,534 here. The bank's share is then Rs 90,00,000. Suppose the borrower brought only the Rs 20 lakh of the turnover method. The bank's share would then be about Rs 1.07 crore.

Method	Borrower's share	Bank limit
Turnover method	Rs 20 lakh	Rs 80 lakh
Cycle method, 25 per cent of current assets	about Rs 36.6 lakh	Rs 90 lakh

Why the two differ: 25 per cent of a year is about 91 days. The turnover method assumes a cycle of about three months. This unit's cycle is 135 days, so it needs more. RBI calls 20 per cent a minimum, so the bank may sanction the higher figure if its policy allows.

What the rule says

RBI RULE, for micro and small units. The Reserve Bank of India fixes a floor for the working capital limit of micro and small enterprises. The floor is 20 per cent of projected annual turnover. It applies where the unit's total fund-based working capital limit from all banks is up to Rs 5 crore. Read it with the RBI Master Direction on lending to MSME sector and our MSME loan rules page.

Where the rule sits today. The Master Direction on Lending to MSME Sector, paragraph 6.1, tells banks to follow the Nayak Committee. That committee was an RBI panel of 1991 on credit to small units. The paragraph points to a circular of 2 March 2001. The direction, as updated on 9 February 2026, no longer prints the numbers.

The numbers sit in RBI's FAQs (frequently asked questions) on MSME, Q.7, updated 29 July 2025. Banks must appraise the real need with the business cycle in mind. For micro and small units the limit is a minimum of 20 per cent of estimated turnover. This holds up to a credit limit of Rs 5 crore.

SSI (Small Scale Industry) is the old name for these units. The Master Circular on Lending to SSI Sector of 1 March 2005 set the same floor. See its paragraph II.3.3, which covers new and existing units. This is an old circular; we cite it for the history.

For co-operative banks RBI prints the full method. It is in the Master Circular on Management of Advances for UCBs of 25 July 2023. See paragraphs 2.1 to 2.5:

The need is 25 per cent of projected turnover.
The borrower brings 5 per cent of turnover from its own capital or long-term funds.
The bank gives at least 20 per cent of turnover.
It covers micro and small units up to Rs 5 crore and other borrowers up to Rs 1 crore.
If the traditional method shows a higher need, the bank may sanction the higher figure.
Above these limits the bank may use the turnover method, a cash budget, or any other method.

Are the numbers minimums? The 20 per cent is a floor on the bank's share. RBI calls it a minimum in all three documents above. The 5 per cent is the borrower's share; RBI does not call it a maximum. A bank may lend more than 20 per cent when the cycle shows more need. The floor uses the turnover figure the bank accepts. So test the borrower's projection first.

RBI RULE, what RBI leaves to banks. For commercial banks, RBI fixes no method for larger borrowers or for firms outside the micro and small sector. See the Master Circular on Loans and Advances of 1 July 2015, paragraph 2.3.9(i). Banks sanction working capital limits after appraising the need. They do so under a loan policy approved by their board.

RBI withdrew the compulsory MPBF (Maximum Permissible Bank Finance) formula in 1997. The UCB Master Circular of 2004, paragraphs 3.1.2 and 3.1.3, records the withdrawal. It lists the turnover method, the cash budget method and a modified MPBF as methods a bank may pick. We could not find a current RBI document for commercial banks that prescribes the cash budget or operating cycle method. These are bank practice.

One RBI rule for very large borrowers: the Loan System guidelines of 5 December 2018. They apply where total fund-based working capital limits are Rs 150 crore or more. From 1 July 2019, at least 60 per cent of such limits must be a loan, not cash credit.

RBI RULE, stock statements and drawing power. A stock statement is the borrower's periodic list of stock, debtors and creditors. The Master Circular on Income Recognition and Asset Classification of 1 April 2025 links it to NPA status:

Paragraph 4.2.4: drawing power must rest on a stock statement not older than three months.
Paragraph 4.2.4: drawings on an older statement are irregular; 90 days of them make the account an NPA.
Paragraph 2.2.1: an account above its limit or drawing power for 90 days is out of order, so an NPA.
Paragraph 4.2.4: a limit not renewed within 180 days of its due date makes the account an NPA.

Paragraph 4.4 of the MSME Master Direction adds two policy duties. Banks must provide for extra working capital when a unit faces a sudden need. Banks must review limits mid-term when demand changes.

BANK PRACTICE, margins and drawing power. Each bank's credit policy decides these. We found no RBI rule fixing the margin on stock or book debts for commercial banks. The range seen in the market:

Margin on stock: 25 per cent is common. Canara Bank's sheet and Bank of Maharashtra's page show 25 per cent.
Margin on book debts: 25 to 40 per cent. Canara Bank's sheet shows 30 per cent in one scheme.
Age of book debts: debtors older than 90 days are usually excluded. Bank of Maharashtra allows up to 180 days.
Unpaid stock: stock bought on credit and not yet paid is excluded before margin.
Stock statement: monthly for most limits, quarterly for some small limits. The sanction letter decides.
Book debt finance: RBI caps it at 75 per cent of limits for UCBs. For commercial banks, bank policy decides.

Your bank's policy decides. See our Working capital rules page.

BANKPULSE VIEW. Treat the turnover method as a floor for small units. Always also compute the cycle from the last two years' accounts. If the cycle shows a higher need, and the borrower can bring the margin, propose the higher limit. Record the reason in the note.

Common mistakes

Dividing stock by sales. Stock is valued at cost. In Example 1 this gives 50 days, not 60.
Mixing 360 and 365 days. In Example 1, 360 days gives 69, not 70. Pick one and stick to it.
Ignoring the season. A balance sheet from the low-stock month hides the peak. Ask for monthly figures.
Counting old debtors as good. A debtor unpaid for 180 days may never pay. Exclude debtors past your bank's cut-off.
Treating 20 per cent as a ceiling. RBI calls it a minimum. A long cycle may need more.
Funding unpaid stock. The supplier has already funded it. Deduct creditors first, or the bank funds the goods twice.

How to use it at your desk

Take the last two audited balance sheets and profit and loss accounts.
Pick out stock, debtors, creditors, sales, cost of sales and purchases for each year.
Compute inventory days, receivable days and payable days with 365 days. Note which figure you divided by.
Compute the cycle for both years. Ask the borrower why it changed.
For a manufacturer, split stock days into raw material, work in progress and finished goods.
For a micro or small unit, compute 25, 20 and 5 per cent of projected turnover.
Compare the turnover-method limit with the cycle-based need. Propose the higher figure only with a reason.
For a seasonal firm, ask for a month-by-month cash budget. Fix a higher limit for the busy months.
Get an age-wise list of debtors: how many days each bill is unpaid. Exclude the old ones.
Fix stock statement frequency and margins as per your bank's policy. Write them in the sanction note.

Related terms

Own contribution (margin money) — the 5 per cent borrower share under the turnover method is own contribution.
Bullet payment — a bullet or interest-only business loan fits a cycle that ends in one large collection.
FOIR (Fixed Obligation to Income Ratio) — FOIR tests a person's fixed payments; the cycle tests a firm's cash timing.
Product pages: Working capital rules, MSME loan rules, RBI MSME Master Direction.