Why does an increase in sales lead to a negative cash flow?

Answer 1

There can be several causes of this odd situation (from most to least likely): 1. Accounts Receivable (AR) increases. AR is when customers purchase on credit, usually over a 30-day period. If you're spending cash to make your product, but you're selling it as AR, you will experience a temporarily negative cash flow. Try exploring setting up some Accounts Payable with suppliers to stabilize your cash. 2. Your profit margin is too small. If the costs of production plus the costs of overhead (especially selling) are too close to your sale price, you may find yourself losing money to your variable expenses (costs that change based on the amount of product you make). Increase your sale price. 3. Production capacity is overwhelmed. Your factory is running at 100%, yet you are selling more than you're making. You want happy customers, so you start authorizing overtime, work your equipment harder than it should, and possibly subcontract to another company to meet demand. That causes your costs to skyrocket, without a matching jump in sale price. Increase your sale price. This does two things: a) demand will go down somewhat, making it easier to manage until you can expand production by adding capacity, and b) help fund that expansion, growing your business organically. Use this info at your own risk. I'm merely an Accounting Major-in-waiting! ;) ~pS!~