You start a small business and you expect it to grow. If your expectations are right and the sales of your product grow, you also have to experience asset growth. Unless your assets grow and keep up with your sales growth, you will find that producing your product is a problem. The key is to forecast sales correctly. If actual sales differ greatly from forecasted sales, then some of your assets, such as inventory (the product you sell) will unexpectedly either build up or decline. The same will happen to your accounts receivable. This is not a desirable situation for a business firm.
Current and Fixed Assets
If your business sells a product, then your business will also have assets - both current and fixed assets. Current assets are those that you expect to liquidate within one year. Current assets include inventory or the products you have for sale, accounts receivable or your credit accounts, and your cash account. Fixed assets have a longer life than one year. They are usually plant and equipment - buildings, machinery, office furniture, electronics, vehicles and other large, expensive assets.
If your small business grows, then your firm will experience asset growth of both current and fixed assets. It is known that businesses fail because of unexpected growth as well as low sales so management has to be watchful at this point in the growth of their businesses. Assets will also grow in order to support your business and your sales. You will have to stock more inventory. You will probably extend more credit to your customers and your accounts receivable will grow.
Initial Business Growth
When a small business is first starting out and begins to grow, all of their current assets will be self-liquidating. Self-liquidating assets are those sold at the end of a specified time period. An example would be a small independent book seller just starting out. That book seller would buy a certain number of books expecting to sell all of them by the end of the time period. That means the inventory is sold. The accounts receivable are collected. The accounts payable or bills to suppliers are paid.
If your business start-up was successful, you move to the next stage of your business. The independent book seller will add additional inventory and perhaps another product line such as e-books. If you are a traditional brick-and-mortar business, you will add inventory to your stock, floor and point of sale displays, and a number of items for the selection by your customers. If your business is online, you may have to expand your website to show your products.
At this stage of business, you will have a certain level of your books that are permanent current assets, along with your self-liquidating inventory. Those permanent current assets are the items from which your customers make their selections as time goes on and form your floor and point of sale displays.
Management Response to Firm Growth
The management response from the stage 1 initial business growth to stage 2 business growth is of critical importance. In the Initial Business growth stage, the business firm has a level of fixed assets at all times. Along with that, they have temporary current assets that rise and fall with customer demand. In the next stage, Business Growth, the level of fixed assets is still there, but the business firm now has a level of permanent current assets on the shelf of their firm. If the firm is growing, so is the level of the permanent current assets. Like in the initial stage of business growth, they also have temporary current assets that rise and fall with customer demand.
It is important to remember that we are not talking about sales. Instead, we are talking about the assets the firm owns that supports firm sales. Assets like inventory and accounts receivable rise with firm growth and fall with firm contraction. They make up permanent current assets and temporary current assets. This is part of the firm's working capital. Business firm management has the task of keeping asset growth in line with sales growth as one of the causes of business failure is too much asset growth for firm sales. Following the example in this article should help business managers with that task.