Understanding Working Capital for a Growing Small Business

Running a growing business requires more than making sales. You also need enough money available to pay suppliers, replenish stock and meet everyday expenses while waiting for customers to pay you.

This money is known as working capital.

A business can be profitable on paper and still struggle because its cash is tied up in stock, unpaid invoices or other short-term commitments. Understanding how working capital operates can help you plan more confidently and recognise when financing may support growth.

What is working capital?

Working capital is the money available to meet your business’s short-term operating needs.

A simple way to understand it is:

Working capital = Current assets − Current liabilities

Current assets are resources that can usually be converted into cash within a year. They may include:

• Cash held by the business

• Stock available for sale

• Payments expected from customers

• Short-term business deposits

Current liabilities are obligations the business expects to settle within a year. These may include:

• Supplier payments

• Rent and utilities

• Salaries and wages

• Short-term loan repayments

• Taxes and other operating expenses

Positive working capital means your short-term assets are greater than your short-term obligations. However, the quality and timing of those assets also matter. Stock on a shelf or an unpaid customer invoice cannot always cover an expense that is due today.

Why growing businesses experience working-capital gaps

Growth often increases the amount of money a business needs before it increases the cash available.

For example, a retailer may receive a large order but need to purchase additional stock before the customer pays. A contractor may need materials and labour to begin a project, while payment is only received after completing a milestone. A farmer may incur production costs months before harvesting and selling.

These timing differences create a working-capital gap.

Common causes include:

• Purchasing more stock to meet increasing demand

• Offering customers time to pay

• Seasonal changes in sales

• Delayed customer payments

• Taking on larger contracts

• Opening another location

• Unexpected equipment or operating costs

A working-capital gap does not always mean the business is failing. It may arise because the business is growing. The important question is whether the gap is temporary, manageable and supported by realistic income expectations.

Signs your business may need more working capital

A shortage of working capital may show up in several ways:

• You regularly delay supplier payments

• Fast-moving products run out because you cannot restock on time

• You use money intended for one expense to cover another

• You struggle to meet payroll or rent despite making sales

• You turn down profitable orders because you cannot fund them

• You depend on emergency borrowing to manage routine expenses

• Customer payments arrive later than your own bills become due

These signs should prompt you to review your cash flow. Financing can help in the right circumstances, but it should not be used to hide persistent losses or an unsustainable business model.

Calculate the amount you actually need

Before seeking financing, identify the specific gap you want to address.

Start by estimating:

1. The operating expense or opportunity you need to fund

2. The total amount required

3. When the money will be needed

4. When the business expects to recover that money

5. How repayments will fit into the business’s normal cash flow

Suppose your business needs KES 300,000 to purchase stock. If you already have KES 100,000 available without affecting essential expenses, the actual gap may be KES 200,000.

Borrowing more than necessary can create avoidable repayment pressure. Borrowing too little may leave the business unable to complete the intended purchase or project. A clear calculation helps you seek an appropriate amount.

Match the financing period to the business need

Working-capital financing is generally intended for short-term operating needs. The repayment period should therefore reflect how quickly the financed activity is expected to generate cash.

If financing is used to purchase stock that normally sells within three months, the repayment structure should account for that sales cycle. Using short-term financing for a long-term investment, such as constructing permanent premises, may put unnecessary pressure on monthly cash flow.

Before accepting any facility, understand:

• The full cost of the financing

• The repayment amount and frequency

• The repayment period

• Any security or documentation required

• What happens if a payment is delayed

• Whether the repayment dates match your income pattern

Products, terms and eligibility requirements vary and are subject to appraisal.

Improve working capital within the business

External financing is only one way to manage working capital. Your internal practices also make a significant difference.

Consider the following actions:

• Follow up on unpaid invoices promptly

• Negotiate reasonable payment terms with suppliers

• Avoid keeping excessive slow-moving stock

• Keep business and personal money separate

• Prepare a simple weekly or monthly cash-flow forecast

• Set aside money for recurring expenses

• Review prices to ensure they cover your true costs

• Build a reserve during stronger trading periods

These practices can reduce unnecessary cash pressure and make it easier to assess whether financing will genuinely help.

Use working-capital financing for a clear purpose

Financing is most useful when connected to a defined business activity with a realistic path to repayment.

Appropriate uses may include:

• Purchasing fast-moving stock

• Funding confirmed customer orders

• Buying production inputs

• Covering temporary operating expenses during a seasonal cycle

• Bridging the period between completing work and receiving payment

Before borrowing, ask: How will this money help the business generate or protect income?

If the answer is unclear, take time to review the decision before committing.

Plan before the pressure begins

The best time to assess working-capital needs is before the business reaches a cash crisis.

Maintain basic records, monitor your cash cycle and forecast upcoming expenses. This gives you more time to compare options, prepare the necessary information and choose financing that supports the business instead of placing it under additional strain.

Working capital is not simply extra money. It is what keeps day-to-day operations moving while the business grows.

If you would like to discuss financing for stock, supplies or another defined business need, Jubilant PLC can help you explore an appropriate option based on your circumstances.

Ready to discuss your financing needs? Apply or enquire today.