Working Capital: How Not to Lose Your Business Due to Lack of Cash

Working capital is your financial safety cushion. It’s the difference between what your company owns (current assets) and what it owes in the short term (current liabilities).

In other words, it’s the funds your business can use to keep day-to-day operations running after paying off all short-term debts.

The formula looks like this:

Current Assets - Current Liabilities = Working Capital

Example: let’s say your café has, at month-end:

• $200,000 in the bank
• $150,000 in inventory (coffee, pastries, supplies)
• $100,000 in receivables from corporate clients

That’s $450,000 in current assets.

Meanwhile, you owe:

• $180,000 to suppliers
• $70,000 in wages

That’s $250,000 in current liabilities.

So, your working capital is $450,000 – $250,000 = $200,000. This is your financial “buffer” — the resources that keep your operations running.

Sufficient working capital is essential for smooth operations. It shows whether a company can meet short-term obligations, cover unexpected costs, and seize growth opportunities.

A restaurant with healthy working capital pays staff and suppliers on time, invests in training, funds seasonal promotions, expands its menu, and can fix equipment right away if it breaks down. In short - it runs stably and grows.

On the other hand, if working capital is tight, the business struggles to cover essentials - rent, raw materials, payroll. That causes disruptions: smaller product ranges, delayed payments, dissatisfied customers, and lost sales. Often, the company is forced to rely on expensive short-term loans, increasing risk of losses or even bankruptcy.

Why It’s Especially Critical for SMEs

Small and medium-sized businesses (SMEs) rarely have easy access to long-term financing. They rely on short-term liabilities - supplier credit, overdrafts, small loans - as their main source of working capital.

For many SMEs, suppliers and banks effectively act as their financiers. That’s why managing working capital is a daily priority for a financial manager.

In many industries, current assets make up a big share of total assets. In manufacturing, they may exceed 50%; in retail, even more. Which means much of the company’s money is “frozen” in inventory and receivables.

Here lies the trap:

• Too many current assets → cash tied up, lower returns.
• Too few → shortages, disruptions, missed payments.

The key is balance: excess working capital reduces profitability, insufficient working capital increases risk.

To manage working capital, you need to understand its building blocks:

1. Cash - your financial oxygen

Money in accounts or on hand, plus equivalents like treasury bills.

• Too much = idle funds not working for you.
• Too little = risk of default.

Tip: keep 1–2 months’ worth of operating expenses in cash.

2. Accounts receivable - money owed to you

Sales made on credit.

• Moderate receivables boost sales.
• Excess receivables = cash flow delays and bad debt risk.

3. Inventory - goods waiting their turn

Raw materials, work-in-progress, and finished goods.

• Too much = tied-up cash, storage costs.
• Too little = stockouts and lost sales.

4. Accounts payable - free credit from suppliers

What you owe suppliers.

• Using payment terms improves liquidity.
• But overdue payments damage trust and may incur penalties.

5. Short-term debt - quick but costly help

Loans, overdrafts, credit lines.

• Useful for temporary shortages.
• But add interest costs and risk.

Strategy 1: Forecast and plan cash flow like the weather

Regular cash-flow planning (inflows and outflows) is the foundation of liquidity management. Build a cash-flow forecast and update it as business conditions change. The more accurately you predict when and how much cash will come in and go out, the better you can prepare - e.g., arrange a credit line or postpone certain expenses.

Practical approach: Create a weekly, monthly, and quarterly forecast. Factor in seasonality. For example, if you sell summer apparel, plan major purchases in autumn while expecting peak sales in spring and summer.

Modern tools - financial ERPs and cash-management platforms - let you automate forecasting and view data in real time. This helps spot potential liquidity gaps early and act in advance.

Strategy 2: Optimise inventory management

Inventory should be enough, but not excessive. Use demand forecasting to buy the right quantities, considering seasonality and sales trends. Keep stock levels that both satisfy customers and avoid tying up too much cash in unsold goods.

Modern methods: Just-in-Time replenishment and robust inventory systems help minimise excess. ABC analysis highlights the 20% of items that generate 80% of revenue (Group A) so you focus where it matters most.

Turnover checks: Regularly review which SKUs fly off the shelves and which get stuck. Slow movers occupy space and freeze cash - consider discounting and replacing them with faster sellers.

Strategy 3: Speed up accounts-receivable collection

Receivables are money already earned but not yet in your account. The faster customers pay, the healthier your working capital.

Incentives for early payment: Offer small discounts for prepayment or quick settlement. Example: 2% off if paid within 10 days instead of the standard 30 can materially accelerate inflows.

Clear credit policy: Set payment terms by customer segment, assess creditworthiness before extending trade credit, and actively follow up on past-due balances. Don’t hesitate to require prepayment from new or higher-risk clients.

Process automation: Use a CRM or accounting software to auto-issue invoices and send reminders. Offer multiple payment options (online, cards, mobile apps). The easier it is to pay, the faster cash arrives.

Strategy 4: Optimise accounts-payable management

Payables aren’t “bad” - they’re free financing from suppliers for a period of time. Use agreed payment terms fully; avoid paying early if cash is needed elsewhere.

Supplier negotiations: Seek better terms - longer credit periods or discounts for early payment - depending on what benefits your cash position most. Reliable customers often get flexible terms.

Balance benefits and risks: Avoid late payments; stable supply and reputation matter more than short-term gains. Overdues can trigger penalties, prepayment demands, or supply stops.

Automation & control: Use systems that track payment schedules and trigger reminders before due dates. Well-managed payables let you use other people’s money for growth - responsibly.

Strategy 5: Track the key financial metrics

Working capital management requires measurement. Monitor liquidity and efficiency regularly.

Current ratio: Current assets ÷ current liabilities.
Above 1.0 suggests enough current assets to cover short-term debts; below 1.0 signals negative net working capital and potential payment stress.

Operating (cash conversion) cycle: Analyse three periods:

• Inventory days (days inventory on hand)
• Days sales outstanding (average days customers take to pay)
• Days payables outstanding (average days you take to pay suppliers)

Together they form the cash conversion cycle. The shorter it is, the faster the company recovers invested cash and the less external financing it needs.

Ongoing monitoring: Timely, accurate reporting helps spot problem trends (e.g., rising overdue receivables or excessive stock) and supports informed decisions.

Технології AI у FinTech сьогодні змінюють підхід до управління фінансами. Вони допомагають будувати платіжні календарі, автоматизувати процеси погодження витрат, аналізувати ризики та оптимізувати витрати.

AI у FinTech особливо активно розвивається у таких напрямках:

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• Розпізнавання шахрайства: миттєве виявлення підозрілих транзакцій
• Алгоритмічна торгівля: автоматичне прийняття торгових рішень
• Персоналізовані фінансові поради: індивідуальні рекомендації для клієнтів

Практичні поради з впровадження для малого та середнього бізнесу:

1. Почніть з простого: спробуйте Microsoft 365 Copilot для Excel замість складних FP&A-систем
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Але варто пам’ятати: AI ризики у фінансах теж існують. Це і помилки у прогнозах, і питання регуляторної відповідності, і потреба в якісних даних.

Важливо підкреслити: навіть найпотужніші платформи не працюють «самі по собі». Для ефективного впровадження AI у фінансах потрібні висококваліфіковані спеціалісти, які розуміють як фінансову методологію, так і можливості технологій.

Без досвідчених фінансистів AI-рішення ризикують залишитися дорогими інструментами, що не приносять користі бізнесу.

Sometimes internal resources are not enough to cover cash flow gaps — and that’s a normal situation for a growing business. Banks offer various working-capital financing products: from revolving credit lines to overdrafts.

Government support in Ukraine
Ukraine offers state support programs for SMEs, such as the “5-7-9%” program, which allows entrepreneurs to access preferential loans to replenish working capital. This is especially relevant during periods of economic instability or seasonal fluctuations in business.

Smart borrowing rules
It’s important to use such tools responsibly: working-capital financing can help you overcome temporary downturns or fund growth, but it is not a substitute for effective working-capital management. Credit is medicine for financial issues, not vitamins for everyday use.

Weekly financial ritual
Every Friday, spend 30 minutes analyzing your cash flows for the upcoming week. This will help you spot potential problems in advance.

The 80/20 rule for inventory
Focus on the 20% of products that bring 80% of your profit. These items should always be in stock.

Automated reminders
Set up automatic reminders for client payments and your own obligations. This reduces the risk of overdue receivables and payables.

Diversify your client base
Don’t rely on just one large client. If they delay payment, your cash flow could suffer significantly.

Mistake #1: Excessive “just in case” inventory
Many entrepreneurs are afraid of running out of stock and over-purchase. The result: “frozen” money and additional storage costs.

Mistake #2: Being naive about receivables
“Good” clients can turn out to be poor payers. Always check creditworthiness and avoid offering unlimited trade credit.

Mistake #3: Ignoring seasonality
Failing to consider seasonal demand fluctuations is a direct path to liquidity problems. Always plan cash flows with business cycles in mind.

Mistake #4: No reserves
Running your working capital too tightly is risky. Always maintain a financial cushion for unexpected situations.

Working capital is not just a number in your financial statements — it’s the heart of your business. It shows how efficiently your company turns money into goods, and goods back into money. The faster this cycle runs, the healthier your business will be.

Key principles for successful management:

• Cash flow planning should be a habit, like brushing your teeth.
• Inventory optimization helps avoid tying up money in “dead” stock.
• Active receivables management speeds up cash inflows.
• Smart use of payables provides free financing.
• Regular monitoring of indicators helps detect problems on time.

Final tip:

Remember: there’s no “perfect” level of working capital. Everything depends on your business specifics, market conditions, and growth ambitions. Too much working capital lowers profitability, while too little increases risks.