What if sales are declining and cost cutting procedures are declining a a faster rate than...

What if sales are declining and cost cutting procedures are declining a a faster rate than sales? If free cash flow is negative for one or two years would that be a signal that the company is in distress, why or why not?

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Expert Solution

Negative cash flow describes a situation in which a firm spends more cash than it takes in. This is a relatively common situation in the first few months or years of a business, when it is still ramping up production and searching for customers. During this period, negative cash flow is supported by debt or equity funding. If a business experiences negative cash flow over the long term, it will likely fail or be sold off, unless investors are willing to inject more money into it. This condition arises when a firm’s business plan is flawed, it is poorly managed, or fraud is draining away cash.

companies can survive without a profit but cant without cash,as sales are declining and cost cutting procedures are declining at a faster rate this results negative cash flows which makes company fails to survive as profits are just a accounting term and cash is what a company need to invest, to do payments etc.

and if its cash flow are negative for one or two years would signal that the company is distress as company cant have access to the fund to invest in working capital in short term. company will start following aggressive approaches which will make the work more riskier and they use to finance short term assets by the long term capitals and long term goal and commitments of the company cant be achieved so as a result a negative cash flows can be a signal that the company is in distress

jeff jeffy answered 2 years ago

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