Working capital is the number most new manufacturers get wrong, and it’s rarely because the calculation is hard — it’s because they don’t do it at all and instead guess a round figure that “feels enough.” The gap between guess and reality is exactly where units that raised proper machinery financing still run out of cash in month two.
What working capital actually pays for
Once your unit is built and machinery installed, working capital is the cash that keeps operations running in the gap between spending money on production and receiving money from sales:
- Raw material purchase — enough stock to keep production running without waiting on each delivery
- Wages and salaries for the period before revenue arrives
- Utility bills (power, water) during production
- Finished goods inventory — stock sitting unsold while you find buyers or fulfil orders
- Receivables gap — the time between delivering goods and actually being paid, especially for B2B sales where 30-60 day payment terms are common
A simple working capital estimation method
The standard approach used in most bank-appraised DPRs is the operating cycle method — estimate how long cash is tied up before it comes back, then fund that gap.
Stage | Typical Duration to Estimate |
|---|---|
Raw material holding period | How many days of raw material stock you keep on hand |
Production/processing period | How many days raw material takes to become finished goods |
Finished goods holding period | How many days finished goods sit before sale |
Receivables period | How many days after sale until payment is actually received |
Less: Payables period | How many days you get from your own suppliers before you have to pay them (this offsets some of the above) |
Add the holding periods, subtract the payables period, and you get your total operating cycle in days. Multiply your daily operating cost (raw materials + wages + overheads) by that cycle length, and you have a reasonable working capital requirement.
A simplified example: if your combined raw material, production, and finished-goods holding period is 30 days, and receivables take another 20 days to collect, but your suppliers give you 10 days’ credit, your operating cycle is roughly 40 days (30 + 20 – 10). If your daily operating cost is ₹15,000, you’d want roughly ₹6 lakh in working capital to comfortably fund that cycle.
Where new manufacturers underestimate this
- Assuming immediate payment. Especially in B2B and government/institutional sales, 30-60 day payment terms are normal, not exceptional — budget for the wait, not the ideal case.
- Ignoring the ramp-up period. Working capital needs are often highest in the first few months, when you’re building initial stock and haven’t yet developed a reliable receivables cycle — this is exactly when cash is tightest and least forgiving.
- Treating working capital as a one-time cost. It’s recurring — the amount calculated above is roughly what you need tied up in the business on an ongoing basis, not a single expense you cover once and forget.
How working capital gets financed
Working capital margin is typically part of your overall project cost (see our project cost calculation guide), funded partly through your own contribution and partly through a working capital loan or cash credit limit — often structured separately from the term loan that funds machinery and construction. Discuss this explicitly with your bank; a common mistake is assuming a term loan for machinery automatically covers ongoing working capital needs, when in practice it usually doesn’t.
Frequently Asked Questions
How do I calculate working capital for a new manufacturing unit?
Estimate your operating cycle — the days raw material sits in stock, production time, finished goods holding period, and receivables collection time, minus any payment credit your own suppliers give you. Multiply the resulting cycle length by your daily operating cost to get a reasonable working capital requirement.
Is working capital a one-time cost or ongoing?
Ongoing. It’s the amount of cash that needs to stay tied up in the business at any given time to keep operations running smoothly, not a single upfront expense. It typically needs replenishing continuously as the operating cycle repeats.
Does my machinery loan cover working capital too?
Usually not automatically. Working capital is often financed through a separate working capital loan or cash credit limit, distinct from the term loan used for machinery and construction. Confirm this explicitly with your bank rather than assuming one loan covers both needs.
Rupak Chakrabarty is the Founder and Lead Business Coach at MUVSI. With over two decades of experience in entrepreneurship, marketing, and business consulting, he helps aspiring entrepreneurs and MSMEs build profitable, market-driven businesses. His expertise includes business planning, B2B marketing, customer acquisition, and digital growth strategies.