A business can have customers, sales and a clear growth opportunity and still struggle to keep operating smoothly if it does not have enough cash available for day-to-day needs.
That is where working capital comes in. It is one of the most practical financial concepts for an entrepreneur to understand because it connects the money available in the business to the expenses required to keep the business running.
The question is not simply, “How much cash should I have?” The more useful question is: “How much cash and short-term resources does my business need to meet its operating needs without putting unnecessary pressure on the business?”
What is working capital?
The FLME Newsletter defines working capital as the cash and short-term resources a business has available to run daily operations, including buying stock, paying staff and covering small emergencies.
In practical terms, working capital is about having enough accessible resources to keep the business moving while you wait for the next customer payment or sales cycle.
The amount a business needs will differ depending on how it operates. A business that buys stock in advance, pays suppliers before customers pay, employs staff or has significant regular operating costs may have different working-capital needs from a business with a different sales and payment cycle.
Why working capital matters
Working capital is closely connected to cash flow. You can have profitable sales and still experience pressure if cash leaves the business before expected income arrives.
For example, a business may receive a large order and need to purchase stock and pay suppliers before the customer settles the invoice. The opportunity is real, but the business still needs enough available resources to fulfil the order and continue meeting its other obligations.
This is why managing working capital is not only an accounting exercise. It is part of making sure the business can continue operating while pursuing opportunities.
What should you include when thinking about your working capital needs?
Stock and inventory
If your business needs to buy goods or materials before making a sale, stock can absorb a significant amount of cash. Review how much stock you normally need, how quickly it moves and when you need to replenish it.
Supplier payments
Consider when suppliers expect payment and whether those payments happen before or after your customers pay you. The timing of these two sides of the transaction can create a working-capital gap.
Salaries and staff costs
Staff payments are part of the regular cost of keeping many businesses operating. Your working-capital planning should account for these commitments when considering how much cash needs to remain available.
Rent and other overheads
Regular costs such as rent, electricity, internet and other operating expenses continue whether or not you make a sale in a particular week. The FLME Newsletter describes these types of costs as overheads.
Small unexpected needs
The FLME definition of working capital also recognises the need to cover small emergencies. Keeping some flexibility in the business can help you deal with an unexpected operating expense without immediately disrupting other commitments.
So, how much working capital does your business need?
There is no single amount that applies to every business. Your requirement depends on the way your business generates and spends cash.
Instead of starting with a fixed figure, map your normal operating cycle. Look at the cash you have available, the payments you expect to receive and the expenses that must be paid before those receipts arrive.
A useful starting point is to ask yourself four questions:
What do I need to pay for before I receive money from customers?
How much do my regular operating costs require me to keep available?
How much money is currently tied up in stock or other short-term business needs?
When are my largest expected customer payments and business expenses due?
A simple working-capital planning exercise
Set aside time at the beginning of each month to create a simple forward-looking view of your operating needs. You do not need a complicated model to begin.
1. List your expected inflows
Write down the customer payments or other business income you reasonably expect to receive and when you expect them.
2. List your essential outflows
Capture upcoming supplier payments, salaries, rent, utilities, stock purchases and other regular operating costs.
3. Identify timing gaps
Look for periods when major expenses fall due before the expected customer receipts arrive. These are the periods that may place the greatest pressure on working capital.
4. Review what is tied up in the business
Consider whether significant cash is sitting in slow-moving stock, unpaid invoices or assets that are not immediately contributing to day-to-day liquidity.
5. Plan before the pressure arrives
If you can see a shortfall coming, address it early. This gives you more time to adjust spending, manage payment timing, review stock purchases or explore an appropriate financing solution where necessary.
Working capital and business growth
Working capital becomes particularly important when a business is growing. A larger order, new customer or expansion opportunity can require the business to spend more before it receives the resulting income.
The FLME Newsletter's guidance on structuring a business for growth emphasises maintaining healthy cash flow and avoiding a situation where all available cash is tied up in fixed assets, leaving too little for day-to-day expenses.
That principle is worth remembering: growth should increase the capacity of the business without leaving it unable to meet its everyday commitments.
When might financing be part of the solution?
Working-capital pressure does not automatically mean that a business needs to borrow. Start by understanding what is causing the gap. It could be delayed customer payments, stock purchases, high operating costs or the timing of a particular growth opportunity.
Where there is a clearly defined working-capital need, financing may be one option to consider. The FLME Newsletter describes KCB's cash-flow-based lending as providing working capital for operations and stock replenishment, with transaction history and account turnover used in assessing the business rather than relying on physical collateral.
The important step is to understand the business need first, then consider whether financing is appropriate and manageable for the business.
A quick working-capital checklist
I know my main weekly and monthly operating expenses.
I know when my major customer payments are expected.
I know which supplier and stock payments need to be made before those receipts arrive.
I know how much cash is tied up in stock or other short-term business needs.
I review my cash position before committing to a large new expense.
I can explain exactly what additional working capital would be used for if a funding need arises.
Working capital is about keeping the business moving. It gives you the resources to buy stock, pay staff, meet regular operating costs and handle small unexpected needs while managing the timing between money coming in and money going out.
Rather than asking what amount another business keeps in its account, understand your own operating cycle. Know what has to be paid, when it has to be paid and when you expect money to come in. That visibility can help you make better decisions about day-to-day operations and future growth.
Explore KCB FLME
KCB FLME provides financial and non-financial support for female-led and made enterprises. If you would like to understand the support available for your business, learn more and register your interest through the KCB FLME page: KCB FLME
