Question

If average revenue is less than average cost there will be a negative cash flow and the firm will be forced to shutdown. Is this correct? Why or why not?

Answer 1

Answer

It’s possible to make money on the sale of your product or service and still not have enough money to pay your bills on time. Negative cash flow doesn’t necessarily mean you’re not profitable. It could be that your bills are coming due before your customer invoices get paid. In others cases, negative cash flow results from losses on sales. When you have negative cash flow from operations, you can take several steps to take advantage of the fact that you’re profitable, or address the reasons you’re not.

Negotiate more favorable credit terms with customers and suppliers to change your cash flow situation. Create long-term cash flow projections using last year’s payables and receivables histories, provided they will be similar during the coming year. Use current trends and any other qualitative analysis to create a more accurate scenario for the coming year. Use this information to create a positive cash flow for your business based on your income and expenses.

So, if average revenue is less than average cost there will be a negative cash flow and the firm will be forced to shutdown is not correct. There are many ways to overcome the position.