Accounting

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

References

Atrill ,

McLaney , Ed (1997 . Accounting and Finance for Non-Specialists . USA : Prentice Hall

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