Hello, Guest   |   Login here

EntreprenAble Blog

How does a company survive?

Paper People Success Sign
All depends on it being solvent and able to pay its bills in the short, medium and long term. The firm must always have sufficient cash to pay for its operating expenses. Thus the policy of the firm for minimum cash is to have enough cash in any given month to pay for next month expenses.

All stakeholders, whether shareholders, employees, creditors and customers, are interested in knowing the solvency of the firm and its continuation as a running concern.

However, if at the same time there is no profit, the business will not be able to continue operating and will be closed down by the shareholders.

Profit and cash flow are not the same thing. Profit is the amount left after expenses are paid, including depreciation and adjustments for accruals, inventory, income earned and not received, etc.

Cash balances in the bank account are not profit though. Profit is used to grow the business and provide an acceptable return on investment (ROI) to shareholders.

11860966_sCash flow shows the point when the business needs an injection of cash. Sometimes it happens to a profitable business to go bankrupt because of cash flow mismanagement. Vice versa, a business can have a perfect cash flow and still not be profitable due to expenses being higher than revenue during extended periods.

For start-ups good cash flow management is the most important activity for the business to survive even if not yet profitable in a short term, In the “>long-term the business must be profitable, so to have the resources to manage the cash flow and provide a ROI acceptable to shareholders and, most importantly justify its own existence.

Posted in: Business matters

Leave a Comment (0) ↓

Leave a Comment