It is possible for a business to fail, even though it is profitable, through lack of liquid funds due to poor cash management. Businesses need to ensure that there is a FLOW of cash passing through the business so that its liabilities can be met as the need arises. On the other hand, having too much more money available in the form of liquid assets can mean that the business is using its resources inefficiently. The exact amount of liquid funds needed by a business will depend on many things, not least the size and type of business but amongst other things the stage of development of the business, and its capital structure, and so on. Management of Working Capital Control of cash flows takes many forms, but one of the main elements is control of working capital.
Cash is but one element of the working capital cycle.
Stock represents the first stage of the flow cycle. Turnover of stock must be maintained if liquidity is not to be put in danger. A bottleneck of slow-moving stock is often the cause of financial problems. The purchase of materials must be monitored carefully. A fine balance is sometimes necessary between bulk buying at more advantageous prices, and the typing-up of funds.