This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
We can carry our analogy still further. All business assets belong in one or the other of two classes: those that are fixed and permanent, and those that are temporary and designed to be converted into cash within a short time; the first class is known as "fixed assets" and the second as "working assets." In every business there should be a proper proportion between the amount invested in fixed assets and the amount reserved for working assets.
Both the individual and the business concern often fail to observe the necessary proportions. Not infrequently an agriculturist buys more land than he can profitably work and we have a "land poor" farmer. Many country merchants buy more stock than they can immediately sell. The less salable portion becomes shopworn and, as a consequence of this needless tying up of money, they are without funds to replace the more salable articles. Many businesses, both great and small, have met disaster because the necessary amount of working capital was not correctly estimated, too much being invested in plant and equipment and an insufficient amount being left to conduct the business.
It is always advisable to possess an emergency fund or some quickly convertible assets. From time to time, opportunities offer which can only be taken advantage of by the possessor of ready cash, and when this propitious chance occurs the forehanded business man can act quickly and profitably.