Not having adequate and capital reserves to weather a sudden and severe business decline can leave a company desperate and without any leverage. The resulting financing, whether from angel investors, venture capitalists, or even a bank, will usually come at a much higher cost. Most parties will sense the desperation and play a waiting game with the company, looking to obtain a much higher percentage of the company for a lot less dollars.
Companies should consistently plan for having at least enough cash or credit available to cover 9 to 12 months of operations. This way, in the event of a downturn, the company can continue its business long-term by having time to pivot its strategy and determine what the viable options are. Without enough working capital the company is at the mercy of the markets and in all likelihood will be forced into drastic business changes and perhaps even bankruptcy.
