Negative Cash Flow
Rapid expansion in sales is claimed to result in negative cash flows because cash budgets and net profit of the company are strongly interrelated. However, in certain cases rapid increase in sales may result in decreased cash flow of business. Sales objective should remain in balance with production costs as it gives an opportunity to avoid negative cash flows in case of rapid expansion in sales. (Atrill & McLaney, 1997)
After the product is appreciated in the market place, its sale is expanded, and then the company has to bring the product back in the marker in a short time without noticeable gap to the customers. It is important for company’s reputation and it shows that the company is consistent with products in its marker share. If a company has a backup for cash flows, won’t loose its net profits under such circumstances. Otherwise, profits will be transferred into losses. One more way to deal with negative cash flows is to increase the price for products with expanded sales. It will give a possibility to prevent negative cash flow. However, cash budgets are claimed not to extend new credits for customers. (Atrill & McLaney, 1997)
If negative cash flows occur, the company will loose, whereas the customers will benefit. Therefore, in cash of negative cash flow due to rapid expansion in sales the company may appear at the edge of insolvency and financial loss. Companies with effective management and financial departments should preview rapid increase in sales. In the company issues safety stocks, it will be able to satisfy its customers and to maintain its inventory. To produce long-term financial strategy a company should keep collateral stocks for financial arrangements as it is important for overcoming emergent targets. (Atrill & McLaney, 1997)
Atrill, P. & McLaney, Ed. (1997). Accounting and Finance for Non-Specialists. USA: Prentice Hall.