Question

Imagine you are a startup online retailer. Your sales are growing really fast, suppliers give you two months' credit on most purchases, and customers pay using debit and credit cards. What would you expect to see on the operating section of the statement of cash flows?

-Positive cash flow

-Negative Cash flows

-Too hard to predict

Describe what you would expect all three sections of the statement of cash flows to look like for this startup online retail business and why.

Answer 1

Ans to 1st question : It would be positive Cash Flow. As Sales are growing fast, customers are paying by debit and credit card no credit or very less credit would be given to customers. On the other hand, I would be getting credit from suppliers of two months, so there will be saving in Cash used to pay Accounts Payable. Even though other expenses would be paid on Cash basis it will not go more than Cash Realised from Sales.

Answer to 2nd question :

For Cash Flow from Operating activities : Cash Flow would be positive as reason mentioned above.

For Cash Flow from Investing Activities : Cash Flow would be negative as any business start up requires utilisation of Cash to Purchase Assets, on the other hand Sales of Assets would not be there. Hence, there would be negative Cash Flow from Investing Activities.

For Cash Flow From Financing Activities : Cash Flow would be positive or No Cash Flow because for a new business chances are more that some funds would have been borrowed from outside as Loan from Bank or Relatives, hence it results in Positive Cash Flow. If no funds are borrowed there may be No Cash Flow but for this chances are very less. There would be no chance for negative cash flow as if business is started no chances of repayments of borrowings.

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