Why Is Keeping a Cash Flow and Working Capital Summary Vital to Scalability?
Sadly, even well-planned companies experience periodic sales declines, which may be due to new competition, economic instability, or unidentifiable factors.
If a decline in sales happens, how do you plan to pay bills due in the meantime? It is true that you might just be able to make enough working capital to scrape by, provided that your business picks up; but if it does not, can you liquidate current assets to cover debts and liabilities? Consider how your growing company’s expenses play into liability and asset generation.
If you buy or finance new equipment, take out a small business loan to cover expenses while your company grows, or lease another office space, you would incur a new business liability. No matter how successful your growing business turns out to be eventually, you would still owe this debt. You can liquidate proprietary information and certain physical items to generate enough cash flow. By growing your business in phases, you can also minimize the chances of developing a networking capital that is in the negative state.