Buying a Business in Sri Lanka: How Much Working Capital You Actually Need

One of the most common buyer shocks in Sri Lanka sounds like this:

“The business is profitable… so why am I constantly short of cash?”

This usually happens within the first 30–90 days after takeover.

The buyer didn’t miscalculate profit.
They misunderstood working capital.

In Sri Lanka, many business purchases fail quietly — not because the business was bad, but because the buyer ran out of operating cash before the business stabilised.

This article explains:

• what working capital actually means in a real Sri Lankan business,

• why purchase price is not the full cost of buying a business,

• how much buffer buyers realistically need,

• and how to avoid the most common working-capital mistakes.

---

First principles: purchase price and working capital are different money

When you buy a business, your money splits into two very different roles.

Purchase price pays for:

• assets,

• goodwill,

• location advantage,

• existing systems,

• the right to operate.

Working capital pays for:

• survival after you take over.

Mixing these two is one of the fastest ways to kill a business.

A business can be profitable on paper and still collapse if:

• rent is due before customers pay,

• staff must be paid weekly or monthly,

• suppliers tighten credit,

• sales dip during transition.

Profit is a long-term measure.
Working capital is day-to-day oxygen.

---

What “working capital” means in a real Sri Lankan business

Forget textbook definitions.

In Sri Lanka, working capital is the cash you need for:

• rent

• staff salaries

• EPF / ETF contributions

• supplier payments

• utilities (electricity, water, telecom)

• inventory replenishment

• transport and logistics

• small repairs and equipment replacements

• marketing and promotions

• timing gaps between cash in and cash out

If any of these stop, the business stops — regardless of profit.

---

Why profitable businesses still struggle after purchase

1. Cash flow timing changes

Sellers often:

• delay payments informally,

• pay suppliers late,

• rely on personal relationships.

Buyers often:

• must pay on time,

• lose informal credit,

• follow stricter processes.

The timing difference creates cash pressure.

2. Transition friction is real

After takeover:

• staff behaviour changes,

• suppliers reassess trust,

• customers test consistency.

Sales often dip temporarily — even in good businesses.

Your working capital must absorb this dip.

3. Rent and lease effects

After transfer:

• rent may increase,

• deposits may reset,

• payment terms may tighten.

Lease uncertainty increases working capital needs.

4. Compliance and clean-ups

Buyers often discover:

• EPF/ETF gaps,

• accounting clean-ups,

• licence renewals,

• system upgrades.

These cost money early, not later.

---

The hidden working-capital drains buyers underestimate

These rarely appear in profit summaries.

Stock reality

• dead or slow-moving inventory

• incorrect stock valuation

• higher reorder costs than expected

Supplier terms

• advances required

• shorter credit periods

• higher minimum order quantities

Equipment surprises

• machines fail after takeover

• air-conditioning repairs

• POS or software upgrades

Marketing spend

• re-introducing the business

• stabilising foot traffic

• correcting seller neglect

These expenses arrive before stability.

---

Working capital and instalment deals: risk on top of risk

Instalment purchases multiply working-capital pressure.

Common buyer thinking:

“The business will pay the instalments.”

Reality:

• instalments compete with rent,

• instalments compete with salaries,

• instalments compete with inventory.

If instalments are funded from the same cash needed to operate, the structure is fragile.

Rule:

Instalments must be payable after the business survives — not instead of survival.

---

Lease and working capital: the overlooked link

Lease changes affect cash immediately.

Buyers should plan for:

• rent increases,

• new security deposits,

• shorter lease terms,

• upfront payments.

Lease uncertainty = higher working-capital requirement.

Ignoring this link causes early stress.

---

A simple working-capital estimation framework (buyer-friendly)

You don’t need formulas. You need logic.

Step 1: List monthly fixed costs

• rent

• core staff salaries

• EPF/ETF

• utilities

• basic admin

Step 2: List monthly variable costs

• inventory purchases

• transport

• casual labour

• marketing

Step 3: Understand cash timing

• when customers pay

• when suppliers must be paid

• weekly vs monthly cycles

Step 4: Add a transition buffer

Assume:

• sales dip for 1–3 months

• unexpected expenses will occur

Working capital =
monthly operating cost × transition months + buffer

Conservative beats clever here.

---

Sri Lanka-style examples (plain English)

Example 1: Retail shop

• Rent: LKR 150,000

• Staff + EPF/ETF: LKR 200,000

• Utilities + misc: LKR 50,000

• Inventory cycle: cash upfront

Monthly operating cost ≈ LKR 400,000

A safe buyer would want:

• 2–3 months operating cash

• separate from purchase price

That’s LKR 800,000–1.2M, minimum.

Example 2: Restaurant or café

• Rent: high

• Staff costs: daily/weekly

• Inventory: perishable

• Sales volatility: high

Even profitable restaurants need larger buffers because:

• costs are immediate,

• margins fluctuate daily.

Under-capitalised restaurants fail fast.

Example 3: Service business

• Lower inventory

• Higher salary exposure

• Client payment delays

Working capital risk comes from:

• delayed receivables,

• staff dependency,

• project gaps.

Buffer still matters — just differently.

---

Rule of thumb (use carefully)

A rough starting point:

2–3 months of total operating costs, not profit.

But adjust upward if:

• rent is high,

• margins are thin,

• owner dependence is strong,

• instalments are involved,

• lease is uncertain.

Rules of thumb are guides, not guarantees.

---

Buyer red flags that signal higher working-capital needs

• thin profit margins

• high rent-to-profit ratio

• inconsistent numbers

• owner-dependent operations

• cash-heavy businesses with weak records

• immediate reinvestment needs

More risk = more buffer.

---

Common buyer mistakes around working capital

• spending everything on purchase price

• assuming sales won’t dip

• assuming supplier credit continues

• ignoring statutory costs

• using overdrafts as a substitute for planning

• underestimating stress during transition

These mistakes are avoidable.

---

How sellers think about working capital (what buyers must know)

Sellers often:

• run lean informally,

• defer expenses,

• absorb shocks personally.

Buyers cannot rely on this.

Your working-capital reality will be different — often higher.

---

How working capital affects negotiation and deal structure

Smart buyers use working capital to:

• negotiate price realistically,

• structure instalments conservatively,

• adjust deposits,

• walk away when numbers don’t work.

If you can’t afford the buffer, you can’t afford the business.

---

Buyer checklist: before you commit

Ask yourself honestly:

• Do I have cash beyond the purchase price?

• Can I survive 2–3 slow months?

• What happens if rent or costs rise?

• Can I fund instalments safely?

• Do I have emergency reserves?

If not, pause.

---

Final thoughts

Working capital is not optional.
It is survival money.

Most buyers who fail did not fail on strategy.
They failed on cash timing.

Conservative buyers last longer.
Cash gives you time.
Time saves businesses.

---

Short practical disclaimer

This article is for general information only and is not financial or legal advice. Always consult a qualified accountant and/or business advisor before committing to a business purchase in Sri Lanka.