Working capital mismanagement remains a top cause of SME failure in South Africa

While many South African businesses report increasing sales, growing revenue may be masking a deeper and more dangerous financial issue: poor cash flow management.

One of the real indicators of a business’s sustainability comes down to working capital discipline, not just top-line performance.

Recent data from a global Xero survey supports this trend:

• 24% of SMEs in South Africa reported major cash flow issues in the past year.
• 72% were forced to use personal savings to keep their business afloat.
• Most SMEs faced liquidity challenges despite strong sales.

The assumption that higher turnover equals financial health is flawed. In fact, we’re seeing many businesses under severe pressure precisely because their operational cash flow can’t keep up with their growth. 

The Revenue Trap

This common misconception that sales growth automatically leads to stronger financial performance, is what the industry terms the Revenue Trap. The "Revenue Trap" lures business owners away from critical working capital management. The revenue trap is defined as the mistaken belief that rising sales will automatically translate into healthy cash flows, especially high growth SMEs. This singular focus on revenue growth, often flashy, fails to ensure that operations are generating cash and more importantly, profit.

Common mistakes made by SMEs include:

• Incorrect and the absence of sales and cash flow forecasting, an increase of staff, infrastructure and inventory tying up cash before revenue is realised.
• Taking on sizable orders with overly competitive pricing resulting in margin eradication and futile growth.
• Misunderstanding the cash flow / working capital cycle, with regards to the increase in customer payment terms and the shortening of supplier payment terms.

Too often we see businesses extending credit terms to customers while paying suppliers on shorter cycles. That gap, even if it’s just 15 or 30 days, can stretch working capital beyond its limit.

Why Working Capital Matters to Funders

In today’s fast paced, digital-first world where everyone expects quick answers, instant decisions and automated results, funding decisions have been replaced by algorithms and credit models, not people. Ask yourself, when was the last time my funder visited my operations, walked the floor and “kicked the tyres”?

Strong revenue is not enough to secure funding. At Paragon Finance, we look at how a business manages its inflows and outflows, how well they forecast, and how resilient their financial structures are under stress. 

Avoiding the “Easy Money” Trap

Be cautious of quick-access, high-cost funding (often referred to as “easy money”) which, while tempting during high-growth phases, can quietly erode profitability through unclear fees, aggressive repayment terms, and compound interest.

Easy funding can feel like a solution in the short term, but it often leads to long-term financial strain. The key is to grow responsibly by building financial systems that support growth without undermining operational stability.

A Practical Framework for Financial Health

To support businesses in becoming funder-ready,adopt a more strategic approach to financial planning — commonly known as FP&A (Financial Planning & Analysis). This includes:

• Planning: Defining clear financial goals
• Forecasting: Anticipating future cash needs
• Budgeting: Allocating capital effectively
• Analysis: Interpreting performance and trends
• Reporting: Presenting financial health to stakeholders

FP&A is no longer a luxury for corporates. It’s a survival tool for any growth-focused business.

True business success is built on the less glamorous, but far more critical, discipline of working capital management. Those who master their cash conversion cycles, and operational efficiency are the ones who not only secure funding but also navigate the challenges of rapid expansion.

Gary Sacks, Finance Consultant at Paragon Finance.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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