Growing businesses often run out of cash, regardless of reporting a profit for the same period.  Have you ever found yourself in this predicament?  The hard truth is that you can grow yourself right out of business by not understanding this concept.  Growth takes capital, and knowing how much it will take is critical to your survival.

Working capital is provided by those assets that turn over into cash in the next operating cycle.  Assets that produce working capital include receivables and inventory.  Periods of net losses erode these assets, as expenses exceed revenues – requiring cash to come from somewhere else.  In order to bridge the gap, businesses often use lines of credit, credit cards, customer deposits, permanent working capital loans from lenders, or additional investment from owners.  The concern here is that you may overuse credit, causing catastrophic cash flow failure to follow if you can’t earn your way out.

Depending on the type of business that you operate, your working capital needs will be different.  Typically, service related companies need less working capital than manufacturers or retailers – because their businesses are less capital intensive.  Whatever your industry, you will require working capital to survive.  If you are feeling the pinch of tight cash flow in spite of your profitability, you may be growing too fast.  Working capital is the fuel for growth – having your tank full will help you reach your destination successfully.