In one of our old articles, we listed a few reasons why small businesses in Kenya struggle for working capital. “Not preparing cash forecasts” was at the top of our list. Good thing, we are not among those people who only criticize but never give solutions. This time, we will show you how to prepare a working capital budget.
This is really important. Multiple studies done in Kenya (trust us!) concur that working capital is the most important determinant of success for small businesses. If you’re not sure, it is basically the money you need to run your business each day. Without this, new small businesses have little chance to survive. And, in any case, most small businesses cannot access funding for long term investment unfortunately. So, these entrepreneurs need to plan around growing organically through good working capital management.
Now, business is not a science. Your working capital budget or needs will be determined by factors unique to you. For instance, there are your personal goals. Nobody can touch that. There is also the duration of your business cycle. Some businesses have short periods between buying from the supplier and selling to the customer.
Working capital budget template
The first step in preparing this business budget is figuring out what components of working capital are relevant to your business. This is composed of a selection of current assets and current liabilities.
Let’s start with current assets. A typical small business in Kenya will own stock (inventory). You already know that this has to be cleared off the store as fast as possible – within the average times of your industry. You have cold cash and the ones at the bank as other current assets. If you are a nice person, you may have prepaid expenses. Perhaps you decided to pay the rent a couple months ahead of time.
There are also short-term debtors. These are the customers who have not paid you yet. The general rule is that manufacturing businesses wait longer before receiving payment. Retailers and service providers get cash on the spot.
Now to current liabilities. All of it is basically short-term credit. It could be mobile-app loans or an overdraft facility like Fuliza. It is also what you owe your suppliers. Retail businesses owe most to suppliers because their business or money cycles are the shortest. If you are a nice person, again, you will set aside provision as contigency for things that may go wrong. Banks set money aside against loan defaulters, for example.
But what about delayed salaries? We know you list them as expenses in the income statement. What do you do when you have not paid salaries? Investopedia has an answer. You should list them as current liabilities. This is because they reduce your amount of working capital when you eventually pay them.
Here’s what your working capital components will look like:
With this knowledge you are good to go. You can pick out each and budget for them in stand-alone fashion. You can also prepare a cash flow statement forecast. This activity is basically predicting what your cash flow for the month or less will be. We won’t do it again. You can find a cash flow statement template here.