You can be profitable on paper and still run out of money. It happens to good businesses with good owners more often than most people realise — and it almost always comes down to working capital.
The income statement shows a healthy net profit. The balance sheet looks fine. And then payroll day arrives and there isn’t enough in the account to cover it. Not because the business is failing. Because profit and cash are not the same thing — and working capital is the number that explains the difference.
What Working Capital Actually Is
Working capital is the difference between what your business owns in the short term and what it owes in the short term.
Working Capital = Current Assets − Current Liabilities
Current assets are everything your business can convert to cash within the next 12 months — your bank balance, money owed to you by customers, and stock not yet sold.
Current liabilities are everything your business must pay within the next 12 months — money owed to suppliers, VAT due to SARS, short-term loan repayments, and outstanding salaries.
The difference between those two numbers is your working capital. A positive number means your business has more coming in than going out in the short term. A negative number means the opposite — and it is a warning sign that requires immediate attention.
Why Profitable Businesses Still Run Out of Money
Profit is an accounting concept. It tells you what the business earned over a period. Working capital is a cash concept. It tells you whether the business can actually pay its bills right now.
Here is the scenario we see all the time.
A construction business completes a large project in May. They invoice R800,000. That R800,000 sits on the income statement as revenue — and a significant portion as profit. But the client pays on 60-day terms. The invoice won’t be settled until July.
Meanwhile, the business has to pay its subcontractors in June. Salaries are due on the 25th. The VAT return is due. The vehicle finance instalment doesn’t pause because a client is slow to pay.
The business is profitable. The business is also struggling to meet its obligations — because the cash hasn’t arrived yet. This is a working capital problem. And it is one of the most common reasons otherwise healthy businesses find themselves in financial difficulty.
The Two Things That Destroy Working Capital
Slow debtors.
Every day a client owes you money and hasn’t paid is a day your working capital is under pressure. A business that invoices well but collects slowly is constantly bridging the gap between what it has earned and what it has received. The longer that gap, the more strain on working capital.
Stock that doesn’t move.
Stock sitting in a warehouse is a current asset — but it’s not cash. If your business carries high levels of slow-moving stock, your working capital looks better on paper than it is in practice. The asset is there. The cash isn’t.
Both are fixable. But only if you’re watching the right numbers.
How to Read Your Working Capital Position
The single most useful ratio for any business owner is the current ratio:
Current Ratio = Current Assets ÷ Current Liabilities
A current ratio above 1 means your business can meet its short-term obligations. Below 1 means current liabilities exceed current assets — the business is under pressure. Most accountants look for a current ratio between 1.5 and 2 for a healthy SME. Below 1 requires immediate attention.
Ask your accountant for this number at your next monthly review. If nobody is showing you your current ratio every month — that is the gap worth closing.
What To Do About a Working Capital Problem
Collect faster. Review your payment terms. Some businesses have moved to 50% upfront, balance on delivery — and found that most clients accept it without hesitation.
Pay slower — strategically. If a supplier gives you 30 days, there is no financial benefit to paying on day 5. Pay on day 30 and keep the cash in the business for longer. This is not about missing deadlines — it is about using the terms you have.
Reduce slow-moving stock. Audit your stock quarterly. Stock that hasn’t moved in 90 days is working capital locked in a warehouse. Clear it, even at a discount, and put the cash back into the business.
Build a working capital buffer. Three months of current liabilities held in a separate account changes everything about how a tight month feels. It turns a potential crisis into a manageable problem.
The Mindset Shift
Most business owners manage their business from the bank balance. They check what’s in the account each morning and make decisions based on that number.
Flip it around.
The bank balance tells you what’s there right now. Working capital tells you what’s coming — whether the business has enough short-term resources to meet its short-term obligations over the months ahead. The business owners who avoid cash flow crises are not the ones who got lucky. They are the ones who stopped watching only the bank balance and started watching the right numbers.
Keep It Simple
- Working capital = current assets minus current liabilities — it tells you if your business can meet its short-term obligations
- A profitable business can still run out of money — profit and cash are not the same thing
- Your current ratio should be above 1. Below 1 means the business is under short-term pressure
- Slow debtors and slow-moving stock are the two most common working capital killers
- Collect faster, pay strategically, and build a buffer — three months of current liabilities is the target
Your income statement tells you if the business is making money. Your working capital position tells you whether it can survive long enough to enjoy it.
General information only — chat to your accountant about your specific situation.