CA Chesta Chawla: Working Capital Explained with a Shopkeeper Example

Last updated on 17th Sep,2026 11

Working Capital is net current assets used for the routine operation of the business. Working Capital is a term used to represent the liquidity of the business. The company’s endowment and the debt conditions can be identified by checking its working capital efficiency. Working capital is used to convert the company’s funds into cash.

CA Chesta Chawla, faculty of CA Inter FM, explains working capital with a well-structured model of a shopkeeper. In this model, she effortlessly explains a shopkeeper's working capital needs in daily operations and how they lead to dependence on working capital.

Application of Working Capital

Working capital has a very strong impact on the daily running of a business. It involves creating assets and meeting the business's current obligations. The key uses of working capital are:

• Routine Operation: For smooth flow of daily operations, positive working capital is needed. Without it, the company's operations stop. For profit-making, it is necessary to work on managing working capital. CA Chesta Chawla explains it as: If roots are weak, how can a tree grow?

• Paying daily obligations: Including employees' requirements and basic needs for the operation of the business, such as electricity, materials, and debtors, plays a significant role in maintaining working capital. Working capital is closely linked with routine works which have recurring activities.

• Maintaining Current Assets & Liabilities: Purchasing of raw materials and all the movement from production to sale of finished goods strongly depends on working capital. Inventory management, along with setting the bills, depends on working capital.

• Managing Debt or taxes: Overdraft, short-term loans, interest, and bills are included in working capital. Therefore, all their functions are responsible for working capital, from arranging to distributing resources. Tax payable is also part of working capital for all amounts due within a year.

• Funds for growth: Working capital is a source that allows a company to take any action for growth and development because it generates revenue. For installing any plants, purchasing assets, or taking new orders, all decisions depend on whether a company fully utilises its working capital or not.

Formula & Example of Working Capital

Calculating working capital, it is a simple deduction of current liabilities from current assets. If the result is positive, it means current assets exceed current liabilities. This is called positive working capital, and vice versa. 

Working Capital= Current Assets - Current Liabilities

Example: A shopkeeper has cash in hand Rs. 50,500, inventories Rs. 10,000, and bills receivable of Rs. 5,000, whereas his short-term debt is Rs. 10,000 and bills payable of Rs. 25,000 

Calculation: Total current assets = Rs. 65,500

Total liabilities = Rs. 35,000

Thus, working capital = 65,500 - 35,000 = Rs. 30,500

Role of Working Capital in Shopkeepers' Daily Cycle

Going through the CA Chesta Chawla example:

The entire day of the shopkeeper's work on working capital, from day one to the existing life of his shop. As:

• Start With Cash: The shopkeeper opens his shop with Rs. 50,500 in his drawer for the day's work. 

• Purchasing goods: He uses Rs. 20,000 to purchase goods for selling them to customers.

• Selling Goods: Then, he sells goods of Rs. 10,000 for Rs. 10,500 to the customers, with a profit of Rs. 500. The customer paid Rs. 5,500 and left, with future payments pending.

• Pay the creditors: Now, he pays the creditors Rs. 10,000 and creates a debt to pay the pending amount later.

• Loops start: Now he has Rs. 26,000 in his drawer for the next day. Again, the loop starts from purchasing-selling-paying.

Cash Conversion Cycle - Explained Through a Shopkeeper

Continuing the shopkeeper example, there are three numbers together that make a Cash Conversion Cycle (CCC); basically, it means how many days the shopkeeper needs to get his cash back to him as cash again. For this, the formula is:

CCC = Inventory days + Receivable days - Payable days

1. Inventory days

Inventory days mean the average number of days that inventory, which is on the shelves of the shop, needs to be sold to the customer.

Formula: Inventory days= (Average Inventory ÷ COGS) × 365

For instance, 

• Bread, milk, etc. products need to be sold in 1 day

• Oil, rice, pulses, spices, etc. need to be sold in 10 to 15 days

• Some durable things like chocolate need to be sold in 45 days.

Why it matters: Every single rupee lying on shelves is in different forms, but the shopkeeper can’t use it in cash to pay debts. What if the inventory days creep up? It means he is over-purchasing stock, or the customer is not giving preference.

2. Receivable days

Receivable days are the time it takes the shopkeeper to collect actual cash from debtors after selling a product.

Formula: Receivable days = (Average Receivables ÷ Credit sales) × 365

For instance,

• Cash customer paid instant, so 0 days

• Regular neighbours settle accounts every Sunday; here, 7 days

• A local institute settles accounts monthly here, 31 days

Why it matters: If the shopkeeper is not getting money on these days, it means he is becoming an unpaid moneylender. His shop looks profitable, but his cash drawer is empty. A sale only becomes real cash when it is collected.

Payable days are the days the shopkeeper can hold his cash before paying his creditors and lenders.

Formula: Payable days = (Average Payables ÷ COGS) × 365

For instance,

• A local seller might demand cash on delivery, so here it is 0 days.

• A main wholesaler can give 5 to 30 days because he trusts the shopkeeper after years of business.

Why it matters: It is a beneficial timeline whose benefits are taken by the shopkeeper. Actually, the credit period helps the shopkeeper in stocking the goods from the wholesalers. The credit in this cycle is good.

Examples of the different periods of CCC

In Period 1,

CCC = 2 + 0 - 10 = -8 days

It is the dream period that means that the shopkeeper collects from the customers 8 days before paying his creditors. He is effectively utilising the shop's money, not his own money.

In Period 2,

CCC = 10 + 15 - 15 = 10 days

Here, the shopkeeper needs 10 more days to get cash reserves for keeping stock for regular operation and covering all the expenses. It happens mostly during the season, like festival season.

Summarizing three levels

Importance of Working Capital

Working Capital is net current assets used for the routine operation of the business. It is an essential element in a business because of the following reasons:

1. Smooth operational cycle

Working capital arranges funds for every single operation in the business. It supports covering the payroll and inventory control without disturbing the operating cycle. A regular working cycle helps in keeping control over utilisation of every material smoothly. It leads to actual profitability of the business instead of only selling goods to customers.
2. Bridges the CCC

A Cash Conversion Cycle (CCC) can be positive, zero, or negative. Working capital is the thing used to cover the difference. A negative CCC is generally beneficial because it improves cash flow. However, relying on it excessively may create challenges if supplier credit terms become shorter or customer payments slow down, making it harder to maintain smooth operations. A combination of both positive and negative CCC is essential for maintaining a balanced environment.

3. Enables growth and development

Only the right working capital can help to take opportunities like bulk-buying to get more discounts, take a large order, take further orders, or start a new product line without disturbing the finance of the company. Growth decisions depend on profitability and financial position, not just profitability alone.

4. Provides financial position

Many investors, lenders, or bankers check credibility through the working capital. Because these parties are concerned about returning their loans, they need to check the financial position of the business; thus, it helps the shopkeeper to disclose his financial position through working capital.

5. Risk avoidance

Unexpected risks like slow sales, delayed customer payments, or a limited supply chain, etc. Can be ascertained through working capital in advance. It helps in reducing the effect of these risks. Sufficient working capital protects the liquidity of the business.

6. Improve relations

Working capital helps in checking the timeline of the creditors and debtors; a healthy result helps in building trust and leads to good relations among parties and increases credibility or other benefits.

Demerits of Negative Working Capital

Negative working capital means that the current liabilities exceed the current assets. It carries risk for the business and increases credit to the business.

1. Liquidity risk

The shopkeeper is unable to maintain sufficient current assets to cover short-term obligations. If cash flows slip slightly, it leads to a struggle for him to have cash to pay creditors and lenders. The liquidation to cash is limited with negative working capital.

2. Reduce creditworthiness

Negative working capital reduced the trust on creditworthiness on the shopkeeper; they limit the supply of goods on credit. It puts pressure on the shopkeeper to raise funds for purchasing goods to create profit or balance working capital.

3. Limited flexibility

Negative working capital means the shopkeeper is not covering liabilities; then how can he raise funds or increase stock? This leads to unexpected expenses or downturns in the position of the business.

4. Affects relations

Negative working capital directly shows poor management of working capital. Vendors and suppliers lose trust due to delays in payments. It leads to a loss of confidence among investors in getting their interest.

Inflation Effects on Working Capital

Inflation leads to an increase in raising of price of everything, which leads to a loss of money. Also, inflation affects working capital in relation to the rise in stock and the rate of interest.

1. Inventory costs

As prices rise, selling off old stock at a lower price will lead to maintaining money for more purchases. It limits the number of stock items the shopkeeper can purchase, as the same amount of money buys fewer items. Stock maintenance is lacking due to inflation.

2. Worse on CCC

It leads to a gap between receiving and paying money, which leads to worsening the CCC. A shopkeeper can’t raise prices suddenly due to losing customers and has to take the impact on himself. The wholesaler may not extend additional credit due to uncertainty about future prices. 

3. Rising cost of credit

Inflation leads to increased interest rates for banks or lenders. Due to this, credit finance became more expensive to hold, like overdrafts, short-term loans, etc. This leads to control of working capital management during emergencies.

4. Risks in receiving payments

Due to inflation, debtors can refuse timely payment, making excuses about inflation, and shopkeepers have no words to insist on payment. Also, shopkeepers always have fear of losing customers due to competing markets. Thus, receiving payment is riskier for shopkeepers.

5. Buffers to real cash

As mentioned above, cash and cash equivalents lose purchasing power during inflation. This liquidity leads to erosion of cash. The cash value becomes less attractive.

How the Shopkeeper Manages It Well

1. Converting inventory into cash

The shopkeeper always strives to convert inventories into cash for further purchasing. The stock lying on the shop shelves creates a burden on him to sell it all the time. It always risks his financial position if it stays lying on the shelves.

2. Stocking smaller quantity

For a well-run business, it is necessary to stock in small quantities rather than ordering large quantities of stock. This helps in avoiding overstocking that locks cash and increases risk. Bulk stock also suffers during inflation.

3. Control over slow-moving stock

A shopkeeper needs to watch every stock regularly so that slow-moving stock can be brought to the front. Like discounting or giving extra benefits so that a little money can be made instead of zero value.

4. Prefer cash-based sales

Shopkeepers sell goods on a cash basis instead of credit-basis for making a good flow of cash. For this, he introduces cash discounts and online payments. This helps in collecting cash quickly rather than waiting for a long time.

5. Reduce stretching payments

Shopkeepers reduce delaying the payment for his creditors to maintain their confidence in extending credit for him. This helps in arranging credit in emergency times and earns respect.

6. Awareness of cash flows

Shopkeepers also have pressure to have money for further purchasing. For this, he regularly looks at the cash flow statements so that maintaining cash will be quite easy the next day. Also, day-to-day tracking of cash helps in preventing liquidity of the business.

Conclusion

Working capital is not just a figure; it is a tyre of the business’ cycle which keeps it moving. As seen from Chesta Chawla’s shopkeeper example, the whole concept of working capital can be easily seen. The maintenance also becomes quite easy with it. A short CCC means timely collection and utilisation of resources, while negative working capital is poor planning for cash flow. Working capital is a link between profit in books and actual cash available. A well-run business needs to look at inventory days, receivable days, and payable days on a regular basis.

Frequently Asked Questions

What is CCC?

CCC stands for Cash Conversion Cycle, which is used to check how long it takes a shopkeeper to convert his cash back into real cash.

Why is working capital essential for any business?

Operational activities totally depend on working capital. Without operational activities, a business can't run.

How can a shopkeeper maintain working capital effectively?

By Faster inventory turnover, Small stocking rather than bulk buying, controlling slow-moving stock, preferring cash-based sales, reducing stretching payments, and awareness of cash flows.

Does inflation really affect working capital?

Yes. Inflation affects working capital the most. Inflation leads to a rise in every price, and the cash value also falls due to it, which is concerned with working capital.

Is a negative CCC good for business?

Yes. A negative Cash Conversion Cycle (CCC) is generally a good sign for a business. It means that the shopkeeper is funding the creditors from the shop’s cash instead of his own pocket.

What is the formula for working capital?

Working Capital is net current assets used for the routine operation of the business. Its formula is working capital = Current assets - Current liabilities.