Ok Prof popped this Finance question and I'm having the hardest time coming up with a clear answer. I know we have some Brilliant people on this board!

"If a small business has a legitimate and sustained positive cash flow can this business still fail from bankruptcy?" Answer Yes or No and include an example or examples of different financial statement (balance sheet, Income statement etc) to back up your answer.

Kind of tricky. I know a business can have all the profit in the world but go bankrupt with out a positive cash flow from its A/R etc to pay its expenses. So this question is kind of turned around...I have a few ideas such as maybe ratio analysis or maybe liability lawsuits or even competition but not to sure. Or maybe the answer is just No and I have to say why. Thanks for the help in Advance!

 

anyone want to take a crack at this....

 

Simple... overhead, expenditures exceeding monthly revenue. Payroll, Benefits, etc. . . some business owners file bankruptcy b/c they are not able to sustain their personal expenses. . . so they file bankruptcy, liquidate their assets, start from scratch, it happens. But with a solid profession no worries, a keen intellect and ambition your good to go 6 figures no prob.

What brought this topic up btw.

 

I really don't see how a business can fail from bankruptcy if it has sustained positive cash flow.

I may be wrong, but your theory about not cashing out accounts receivable in time I don't think holds water. Cash-flow as far as I know is the only "real time" way to come to terms with how much REAL usable money your business has at all times. So the cash coming in would only be recorder when the accounts receivable got paid on....and if it's sustained positive cash flow then that says to me that the accounts receivable being "too late" is not a problem. If it is sustained and positive, then that 100% means you are above break-even each and every month. Cash flow is the most important thing to the survival of a business.

I think alot of times what happens is vice versa. You can have more asset than liability, and you can be turning a profit every month, but if your accounts receivable take a month or more to get paid on then you might not have the cash to survive even though on paper you made enough sales. So the cash isn't there.

hope this help in some way, and i could be way off here, but my answer is no

 

[QUOTE=xpander4,Jul 10 2004, 06:54 PM] I really don't see how a business can fail from bankruptcy if it has sustained positive cash flow.

 

Thanks for the great suggestions guys. I also thought about the debt issue....Ok so if a business has good cash flow but it also could have debt that is outstanding. What if now they have to pay outstanding bonds they had or suddenly one of their outstanding debt comes knocking on the door and wants there money and they have to pay that but there cash flow is suddenly not enough to compensate. They can then defeat this though by maybe restructuring there payment plan if they can do that at as a last ditch effort. I'm thinking of something along this route maybe? I still need to use examples of different finance sheets also.

 

Everything your saying is true. But if a "business isn't profitable" then there's obviously no sustained positive cash flow. Getting the cash flow into the positives and keeping track of cash is the hardest thing in business because accounts are being received at different times, bills are getting paid at different times.

Also the question asked for financials to back up your answer, and personal debt wouldn't show up on financials.

For an S corp the individual and the company are two entirely different entities.

Even STILL......if the company has a sustained positive cash flow that means it's covering it's debt expense each and every month. That means the bills are paid off and there's cash left over. That's my understanding of having positive cash.

 

well then that means the cash flow is not sustained and positive if its not enough to pay the bills if cash flow "suddenly" isn't enough....then it isn't sustained. Again if cash flow is SUSTAINED and POSITIVE then the company can continue on forever and ever.

If you turn a profit margin on your product, but you still have HUGE bills to pay that relate to debt, then there is a cash OUTflow going out to pay those bills.....meaning you do not have a sustained positive cash flow.

 

yes.

the only reason the person can have a positive cash flow and lose money is if they have a huge amount of amorization and what not.

 

[QUOTE=xpander4,Jul 11 2004, 09:43 AM] Everything your saying is true.