Entrepreneurs who divert business cash into shares, land and other investments risk crippling operations, Stanbic Bank Kenya CEO Michael Mutiga has warned, urging firms to protect their working capital.
The banker warns business owners against treating money in company accounts as personal savings or surplus cash that can be moved into investments without considering the firm's operating needs.
Mutiga illustrated the risk using the example of a business owner who withdraws company money to invest in an initial public offering (IPO), expecting the shares to double in value. Instead, the investment loses 20 per cent, leaving the business short of cash to pay salaries and replenish inventory.
Speaking during the Kenya Bankers Association's My Chat with a Bank CEO interview, Mutiga said that the loss could leave a company struggling to meet its obligations even as its owner waits for an investment to recover its value.
“Try to separate you as the individual and you as the business,” Mutiga advised.
The warning comes against a backdrop of working-capital pressures among Kenya's small businesses, many of which depend on daily sales to pay suppliers, replenish stock and meet operating costs.
A 2023 analysis conducted with the Central Bank of Kenya and the Kenya National Bureau of Statistics, found that 46 per cent of businesses that had closed cited lack of working capital as a reason. Reduced customer demand was cited by 24 per cent.
Cash-flow pressures can also arise when businesses pay suppliers before receiving money from their customers.
An International Finance Corporation assessment of Kenya's supply-chain finance market, published in 2022, found that some small business suppliers waited more than 90 days for payment, while businesses buying from suppliers often had to pay upfront or within 30 days.
Such delays can leave businesses short of money for inventory and other daily expenses, even when customers owe them money.
Mutiga's advice was that business owners should establish a clear distinction between company funds and personal income.
Rather than taking money directly from sales, entrepreneurs should pay themselves through an agreed salary or dividends where the business has made a profit and can afford the distribution.
Dividends, he explained, should come from surplus funds after a company has met its expenses and other financial obligations. Treating revenue as personal income before accounting for these costs can weaken a business's ability to operate.
He also urged entrepreneurs to build cash reserves that can cover operating expenses during periods when income falls or payments from customers are delayed.
For businesses with seasonal income, the approach requires owners to plan beyond the period when sales are strong.
Money earned during peak seasons should help meet costs during slower months rather than all being spent or committed to investments.
Mutiga also pointed to the need to manage the timing of payments to suppliers and collections from customers.
Businesses should seek payment terms that match their cash-flow cycles, reducing the risk of having to meet obligations before money owed to them comes in.
For funds not immediately required for operations, business owners can consider savings accounts, fixed-income accounts and money market funds, depending on when the money will be needed and the risks involved.
However, he cautioned against tying up money that a business needs to pay salaries, purchase stock or meet other short-term obligations.
