Question

During a credit crunch, small firms appear to be harmed more than large firms are. Explain why this is true.

Answer 1

During the Credit Crunch, small firms more harmed beacuse they have limited Liquidity to ensure the continuation of trading/manufacturing cycle.

example: A (small firm) is having only 2 Debtor(B &C) from whome 20$ each is due to collect and available cash is 20$ with A. In this case if A wants to make further purchases and minimum purchase lot acceptable by supplier is 50$. Now even if A is able to collect from 1 debtor then also he will not be able to make his next purchase untill unless he realise the payment from 2nd debtor as total cash available with his will be 20$+20$= 40$ only. hence his next purchases is only depend upon the realisation from both the 2 Debtors (B &C).

similar situation in case of Large Firm: "Firm XYZ" is having 20 Debtors and Average dues from Each Debtor is 120$ and cash in hand is only 20$. now if he wants to make further purchases then same as above he has to realise the Debtors. Now if say only one debtors out of 20, makes him payment then he will be available with cash of 20$+120$= 140$. and he can place the almost 3 approx orders of each minimum of 50$. hence business of XYZ shall be less hamper as compare to a small Firm "A" as discussed above.

hence it is true that in case of Cash or credit crunch small firm will suffer more as compare to the Big firm.