Question

Cash Flow Banckrupcy

Why is cash flow important to a company? Research a case where a company went out of business or declared bankruptcy due to poor cash flow and not lack of sales, then summarize it for your initial post.

Answer 1

Cash flow is extremely crucial for the well being of a company. It is something that has to be looked upon with extreme care. A positive cashflow is always good for the company and helps reduce risk of bankruptcy. Cash in hand is always a poweful tool. You can always find out a way of problems if you have some cash in hand and hence have a positive cashflow.

Now to name 1 single company which went out of business or declared bankruptcy due to cash flow problems rather than lack of sales would be hard. The reason being that there are hundreds and thousands of companies who have encountered this same issue.

There is a saying that almost 80% of startups encounter this issue at some stage of their business and most of them dont manage to get back up once knocked down.

Having high sales doesnt ensure that your business will run smoothly. For the well being and smooth running of the business, cash is essential. Theres nothing more powerful than cash. Even when sales are high we must ensure that its the appropriate credit periods thats being given to the customers and also at the same time we must look whether we are getting good credit periods from our suppliers. The credit period we are giving our customers should always be lower than that we are recieving from our suppliers. Only then can we ensure that the cash flow will be positive as we only need to pay after we recieve the cash from our customers.

Another major issue startups face is the high initial investment they make. Initially such high amounts of cash are used that they make it hard for themselves to reach a level of profit in the early stages. Reason being that all this investment made initially has to be gained back from the business and then only can they start thinking about profits.

These are some of the things that businesses should take care of, which uf done correctly would help them maintain a positive cash flow and hence the smooth running of the business. As i said earlier, cash in hand is one the greatest assets.

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