When small businesses fail, poor cash flow is usually the culprit. The company n

Question

When small businesses fail, poor cash flow is usually the culprit. The company needs to keep operating even while waiting for revenues from sales that it has already completed (i.e., accounts receivable). Why does this cash crunch worsen, rather than soften, when sales grow? When small businesses fail, poor cash flow is usually the culprit. The company needs to keep operating even while waiting for revenues from sales that it has already completed (i.e., accounts receivable). Why does this cash crunch worsen, rather than soften, when sales grow?

Explanation / Answer

Explanation:

Small business often face cash crunch because of smaller cash flow they have compared to large business. Normally when sales grow in smaller business cash crunch worsen, because small business owner has given the money to vendors and supplier of raw material, which has been used in production of final product. Another reason for tight cash crunch is that not all sales is in cash some of the sale happens on credit basis so that money is also get stuck.

The simple reason for the cash crunch on growing sales is that raw material supplier and vendors needs to get paid in advance and credit sales.

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