Businesses need to make a profit. Profit provides capital for expansion and a return on their...

Businesses need to make a profit. Profit provides capital for expansion and a return on their investment to the owners of the business. Do businesses also need to generate cash? Can a business be profitable and yet run out of cash? What is characteristic of a business that generates lots of profits but doesn't have enough cash to operate.

Expert Solution

Business can carry out their sales on 2 way which are given below:

1) Sales done on cash basis. Here transaction is done by providing goods or services to customer for taking cash on the spot in return.

2) Sales done on credit: Here transaction is done by providing goods or services to customer with a promise from the customer that they will pay required amount within a certain period.

Business done on cash is always good for the business but business done on credit has a risk involved in this. Sometime customer fails to pay the promised amount within given time frame and they sometime default altogether. If the credit cycle of the business is higher than usual then business will report profit but they will run out if cash to carry out their operational activities. Default from the credit customer also have the dame fate.

Hence, business should most of the portion of sales in cash and to some extent they can do sales on credit but their credit cycle should be good and default from the customer should also be low for a successful business.

jeff jeffy answered 7 months ago

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