Case 023Forecasting and modellingWarm up
Veltrona Textiles grows revenue from Rs 2,000 crore to Rs 2,400 crore with debtor days of 70, inventory days of 90 and payable days of 60. How much extra working capital does the growth need?
1The situation
Veltrona Textiles weaves cotton fabric for garment exporters. Revenue grows 20%, from Rs 2,000 crore to Rs 2,400 crore. Customers take 70 days to pay, cloth sits in inventory for 90 days, and Veltrona takes 60 days to pay its yarn suppliers. For this first pass, measure all three on revenue. Cost of goods is 70% of revenue and the net margin is 6%.
2Your task
How much extra working capital does the growth need, where does it come from, and what does it mean for cash?
Quick check
Roughly how much extra working capital does the Rs 400 crore of growth need?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About Rs 110 crore. The net cycle is 70 + 90 - 60 = 100 days, so working capital is 100 days of revenue, and 100/365 of the Rs 400 crore increase is Rs 109.6 crore. That is about 76% of the year's Rs 144 crore of profit. Measuring inventory and payables on cost of goods rather than revenue trims it to about Rs 100 crore.
Step 1Why does growth need working capital at all?
A tailor who takes twice as many orders must buy twice as much cloth before any customer pays. When the days stay the same, every working capital balance grows in step with revenue, so growth absorbs cash even if nothing about the business changes. The cash conversion cycleReceivable days plus inventory days minus payable days: how long the business funds each sale from its own money. tells you how many days of revenue are tied up: for Veltrona, 70 + 90 - 60 = 100 days.
Step 2How does each line move?
Work each balance, then net. Receivables rise by 70/365 of Rs 400 crore, about Rs 76.7 crore. Inventory rises by 90/365, about Rs 98.6 crore. Payables, which suppliers fund, rise by 60/365, about Rs 65.8 crore. The net increase is Rs 109.6 crore, and working capital goes from about Rs 548 crore to Rs 658 crore.
| Rs crore | Days | At Rs 2,000 crore | At Rs 2,400 crore | Increase |
|---|---|---|---|---|
| Receivables | 70 | 383.6 | 460.3 | 76.7 |
| Inventory | 90 | 493.2 | 591.8 | 98.6 |
| Payables | (60) | (328.8) | (394.5) | (65.8) |
| Working capital | 100 | 547.9 | 657.5 | 109.6 |
Step 3What does it mean for cash, and what would a sharper answer add?
Profit at 6% of Rs 2,400 crore is about Rs 144 crore, and working capital takes about 76% of it before a rupee of capex. Fast growth in a business with a long cash cycle can make it cash poor while it reports record profits. The refinement: inventory and payables are really days of cost of goods, not revenue. At 70% cost of goods the net cycle is 70 + 30 x 0.7, about 91 days, and the need falls to about Rs 100 crore. Give the quick answer first, then offer the refinement.
Where candidates lose it
The common error is adding all three day counts, 70 + 90 + 60, and forgetting that payables are money the business owes, which funds it. That gives 220 days and more than doubles the answer.
The second is applying the days to the whole Rs 2,400 crore of revenue and calling Rs 658 crore the need. That is the total balance; the growth only needs the increase.
What the interviewer asks next
- If Veltrona pushed payables to 75 days, how much cash would it release?
- How would you fund the Rs 110 crore if profit is already committed to capex?
- What would you ask management if receivable days rose to 85 next year?
Company names and figures are illustrative.