Reasons why a company has positive cash flows but is still facing grave trouble

There might arise situations where you witness positive cash flows in the statement of cash flow but still, the company is facing hardships, owing to various reasons.

  1. Increase in bad debts
    Bad debts being a non-cash expense will never be reflected in the cash flow statement. However, a company may face plenty of hardships, if its bad debts increase over time, instead of reporting positive cash flows.

  2. Increase in borrowings accepted
    Positive cash flows can also arise because of the increase in the loans accepted by entities. Increase in borrowings will result in higher interest payments which could be troublesome. Also, repayment of the loan accepted could be challenging for an entity.

  3. Delay in payments
    In order to report positive cash flows during an accounting period, the company might delay the payment of the amount due to the creditors, moneylenders, etc.
    However, this could prove to be adverse for the entity as it will have to anyway discharge all these amounts due in the future period. Also, it could be possible that the entity will have to settle these amounts due along with interest or penalties.

  4. Sale of inventory at lower cost
    Positive cash flows can even occur as a result of the entity selling its inventory at a price lower than its purchase price. This is done by companies to generate immediate cash to pay bills due, to avoid bankruptcy, and for its day to day operations.
    So, despite having positive cash flow, the company might run into losses by selling its inventory at a loss.

  5. Revenues earned not introduced back into the business

Earning revenue increases positive cash flow. But, it is of utmost importance for a company to bring back the revenue earned and utilize it for growth prospects, increase the production and sales of the business, and for further expansion. Positive cash flow arising from earning revenues but not directing it back for business purposes is worthless.