Entrepreneurship, Second Edition

11.14. CONCLUSION

Working capital is often misinterpreted as being synonymous with firm liquidity. In fact, only a part of net working capital is liquid; the balance of net working capital is tied up in firm operations. Liquidity is largely a function of a firm's growth and the timing of receipts and payments. In situations where payments are made to suppliers before customers pay, growth in sales generally results in lower liquidity.

Preparing a cash-flow forecast assists entrepreneurs in assessing the timing and maturity of funding needs. With a cash-flow forecast, the entrepreneur can more easily determine the type of funding to procure and the small, growing firm's ability to grow with available funds. This includes efficiencies in accounts receivable, inventories, payables, and accruals. To the extent that entrepreneurs can successfully negotiate with customers and suppliers, they will be able to manage future growth. However, small firms are rarely afforded the benefits associated with growth funded exclusively through internal cash generation. The more common occurrence includes external debt sources, leasing, cash innovations, and small firm/governmental programs. Such is the fate of the small business entrepreneur. Early growth stages result in large funding requirements and huge risks for those who can't meet payroll and supplier demands. However, once an entrepreneur has negotiated for a level of funds from external sources, including bank financing, privately placed ...