Insolvent Periods of High Sales Growth

Increased cash outflow over the cash inflow is mainly due to many reasons which require a close look into the affairs of the business. Most of the businesses come to know about the poor cash flow problem at the time when this situation really gets worse and the business has no money to pay for its debts and credits. However, if managed properly many businesses can survive through the same revenue and profit. This case may arise due to the fact that the business has some or all of the factors described below. This may happen due to the fact that companies have either too many debtors who do not pay or too many creditors whom a business has to pay constantly after some fixed time. Business has made over financing or over trading resulting in the cash of business being stuck for some time. It is a good move from the side of businesses to reinvest the money they have into the business but this too results in the decrease in cash in hand in some cases. One of the most crucial aspects of cash management is cash budgeting and it has been observed that many businesses, especially the small ones, fail to make cash budgets which eventually results in the over cash outflows from the business. During the period of high sales growth, there is a fear of tightened cash situation for the business. This is due to the fact that business has to pay for the purchases made on time in order to avoid any amount of interest on the late payment and at the same time they rely heavily on the timely payment from their debtors which is most of the times not appropriately honored. Thus, the cash of the business is stuck for some time resulting in the halt of operational activities. In order to avoid the above-described situation, managers need to come up with a sound plan for appropriate cash management. This can be done through making comprehensive cash budgets in which the target for cash inflow and cash outflow is set.

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