Practical Working Capital Management Strategies for African Startups
In today’s economic landscape, African startups face mounting challenges in extending their runway amidst fluctuating capital availability. According to Africa: The Big Deal, African startups raised only $2.2B in equity and debt capital in 2024, the lowest level since 2020 and Q1 2025 at $460M, the lowest quarterly raise in the last four years. A recent webinar on working capital management for our portfolio companies brought together a panel of experts to discuss these pressing issues. The discussion emphasized the urgent need for robust cash management strategies tailored to the unique dynamics of the African market.
Understanding Working Capital Management
Working capital management is the process of overseeing a company’s short-term assets and liabilities to ensure operational efficiency. It includes managing cash flow, inventory, receivables, and payables, all of which are vital for maintaining liquidity and solvency. For startups in Africa’s diverse sectors, effective working capital management is critical for sustainability and growth. Founders must adopt strategic approaches to optimize their working capital in response to unique economic challenges. Tips for managing working capital effectively include:
- Build Strong Relationships
Managing working capital effectively goes beyond internal controls, it also depends on the strength of external relationships. Building long-term trust with investors through consistent updates fosters confidence and keeps the business top-of-mind when funding opportunities arise. Equally, strong supplier relationships can lead to more flexible payment terms, offering crucial cash flow relief during tight periods. By proactively engaging financial institutions and capital providers early, founders can ensure a deeper understanding of their business model, which increases the likelihood of accessing financing that truly fits the company’s stage and cash cycle. - Understand Financial Products
Familiarity with the various financial products available is essential for effective working capital management. By tracking cash flows, founders can anticipate their funding needs and select the right financial instruments. Different funds, such as closed-ended and open-ended funds, cater to various business needs. It’s important to evaluate which financial product aligns best with a startup’s operational model and cash flow requirements. Startups need to have a comprehensive understanding of the business model and cash flow to negotiate favorable financing terms that match cash cycles. Additionally, maintaining open communication and continuous education with financial partners about unique financial needs can foster trust and unlock the necessary funding. - Monitor Cash Flow Regularly
Regular cash flow monitoring is vital for sustaining financial health. Founders should establish a systematic approach to review bank statements and analyze cash flow patterns. By recognizing trends in revenue generation and expenditures, startups can identify periods of surplus and deficit. A robust cash flow analysis is essential for anticipating financial needs and mitigating risks associated with cash shortages. One recommendation is to apply the principle of essentialism encouraging businesses to regularly track key cost items such as staff expenses, rental leases, and travel costs on a monthly basis to keep costs optimized. Conversely, holding excess cash can become problematic if it fails to generate returns, emphasizing the need for effective metrics to manage inventory and receivables. By implementing these internal controls, companies can closely monitor cash flow and extend their financial runway. - Leverage Treasury Management
In a higher interest rate environment, startups must view cash not just as a resource to preserve but as an asset to deploy strategically. Treating treasury management as a core function allows businesses to unlock working capital by tightening collection cycles, negotiating extended payables, and putting idle cash to work. For instance, short-term investments in instruments like money market funds can generate returns that help offset operational expenses without compromising liquidity. This shift transforms finance from a passive support role into an active value driver. Founders should also evaluate financial tools critically understanding the trade-offs between instruments like purchase order financing and receivables-backed guarantees and consider insurance or credit enhancements that reduce the need for rigid collateral structures. - Focus on Sustainable Growth
Pursuing sustainable growth is essential for startups aiming to achieve cashflow positivity and reduce dependence on external funding. When debt is used strategically to fuel growth rather than to plug operational gaps it can align stakeholder interests around long-term expansion. Transparent communication with investors is key, especially when balancing the expectations of both debt and equity holders. Additionally, engaging in sectors that intersect with pressing global challenges such as clean energy, sustainable agriculture, and waste management can provide more stable revenue streams. By focusing on sustainable practices, founders can attract socially conscious investors, thereby enhancing their working capital prospects. - Utilize Local Currency Financing
Due to the volatility of currencies in many African economies, startups should consider financing in local currency to align with operational revenues and minimize foreign exchange risk. Facilities that tie interest rates to local benchmarks offer more predictability and shield businesses from international rate fluctuations or devaluation shocks. When choosing financing, it’s essential to look beyond interest rates and fees. Some investors offer technical assistance, strategic insights, and access to network resources that can significantly benefit small teams and accelerate growth. Reviewing all aspects of a term sheet and assessing these added benefits can lead to more effective scaling and stronger long-term partnerships. - Be Strategic with Debt Management
Debt can support growth when structured thoughtfully around a startup’s cash flow realities. Founders should monitor key working capital metrics such as receivables, payables, and inventory while maintaining a cash buffer to safeguard against unexpected shortfalls. Repayment terms should align with the business’s revenue cycle, especially in industries with long lead times between input costs and cash inflows. Beyond repayment, striking the right balance between debt and equity is essential. Using debt to fund strategic growth, rather than cover operating gaps, creates more sustainable outcomes. Founders should also consider alternative collateral options, such as using specific assets rather than equity or cash, to maintain control and financial flexibility. - Implement Hedging Strategies
In African markets, where currency volatility is a persistent challenge, especially for startups earning in local currencies but holding foreign-denominated debt, effective hedging is essential for financial stability. Depreciation risks common in countries like Nigeria and Kenya can erode margins and strain operations. To mitigate this, startups should align currency inflows and outflows where possible and work with local financial institutions to access practical, cost-effective hedging solutions. For those requiring hard currency funding, tools like Non-Deliverable Forwards (NDFs) and products from MFX Currency Risk Solutions or the TCX Fund can offer protection. However, these instruments are only effective when paired with a clear and predictable cash flow plan. Other strategies such as using hard currency reserves as collateral, timing conversions carefully, or delaying forex transactions until market conditions improve can also reduce exposure. Taken together, these approaches help startups manage currency risk while maintaining operational flexibility in dynamic market environments.
Final Thoughts
In today’s capital-constrained environment, strong working capital management sets successful startups apart. African founders who take a proactive approach to cash flow planning, financing strategy, and relationship building are better equipped to navigate funding volatility and scale sustainably. It’s no longer just about how much cash is in the bank, but how effectively that capital moves through the business. The key question has shifted from “When will my next round close?” to “How do I build a business that thrives between rounds?” While working capital discipline may not make headlines, it is often the quiet engine that keeps operations running and growth on track.