Question

Why is it important for firms to generate positive cash flow from their operations?

Answer 1

It is important for the firms to generate positive cash flows from their operations. Positive cash flow is the indicator that there is increase in liquid assets of the entity. This enable the entity to settle its debts, reinvest in its business, expansion of business, return of money to its shareholders, pay for day to day operational expenses and provide a shield against future financial challenges or unavoidable circumstances.

If cashflow is negative then the entity will not be able to bear for long run the payments related to daily operations, taxes, purchasing inventory, paying its employees or workers etc.

Therefore for a business to be successfull in long run, it needs to generate profits while also operating with positive cash flows.