John Hay In: Category - Accounting InterviewsIs it possible for a company to show positive cash flows but still be in trouble?positive cash flows ShareFacebook1 AnswerVotedRecent Vaishnavi_Shetty 2020-08-09T01:35:13+05:30Added an answer on August 9, 2020 at 1:35 am Yes, it is possible for a company to show positive cash flows but still be in grave trouble.To begin with, let me explain to you the meaning of positive cash flows.Meaning of Positive Cash flowsPositive Cash flow is an indication that the cash balance of an entity has increased from its previous year. It also represents that the cash inflow is greater than the cash outflow during the period.Positive Cash flow = Closing Cash & Cash Equivalents > Opening Cash & Cash Equivalents; OR Cash Inflow > Cash OutflowReasons why a company has positive cash flows but is still facing grave troubleThere 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 debtsBad debts being a non-cash expense will never be reflected in the cash flow statement. However, a company may face great deal of hardships, if its bad debts increase over time, instead of reporting positive cash flows.2. Increase in borrowings acceptedPositive 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 paymentsIn 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 costPositive 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 businessEarning revenue increases positive cash flow. But, it is utmost important for a company to bring back the revenue earned and utilize it for the 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.6. Disposing of long-term assetsPositive cash flow could also be a result of the cash inflow arising from the sale of long-term assets. Companies in need of cash might dispose off their assets primarily held for long-term purposes. This could land them in big trouble in the future as there would be lack of assets generating future economic value to the entity.I hope after reading this answer, you might have got an insight of the various reasons for companies facing trouble despite reporting positive cash flows.0Reply Share ShareShare on FacebookShare on TwitterShare on LinkedInShare on WhatsAppLeave an answerCancel replyYou must login to add an answer. Username or email* Password* Captcha* Click on image to update the captcha. Remember Me! Forgot Password?