Question

What can happen if a company grows to fast?

A. It means they just need to borrow more

B. It means they need to sell more stock

C. They can run out of cash to support their growth

D. Cash is never an issue for any company

Answer 1

The Correct answer is C. They can run out of cash to support their growth.

When a company grows too fast it finds it diffcult to manage its cash. Larger the business, larger is the demand for goods and to fulfil such demand expenditure also has to be incurred inorder to keep the operations up and running. In many cases a company would not be able to keep up with these rising expenditures and thus it would empty its funds. It is also to be noted that most of the businesses allow credit to their customer. This also blocks the funds of the company. Now as the company would grow, its credit sales would also grow. The growth in credit sales would lead the business to look at other avenues for funds as the payments from the customers will be received during the credit period and not instantly. Therefore a company would need a careful assessment of its finances once it starts growing otherwise it could soon run out of cash resources to support its current and future objectives.