If a firm makes a loss in the short run, should it shut down? If no, discuss. If yes, discuss.Offer examples
First we have to distinguish what a loss represents. On the books, an accounting loss means that the firm spent more money than it received. And remember that this loss is usually reported AFTER the event has occurred - usually 30-60 days after the operational cycle, or calendar/fiscal year. As such, just like reporting a profit, it may have very little meaning from an operational standpoint.
The real measurement from a financial standpoint that we are interested in is CASH FLOW. Does the firm have the ability to increase cash from its operations and pay its bills in the short run? Does it have the ability to borrow to cover short term costs as it is collecting cash for its use? These are the important items which a firm needs to understand before closing its doors. Further, does it have the ability to increase its sales, while controlling its costs to establish a sustainable business model?
A few examples will illustrate this concept. It took AOL 13 years to report its first profit, yet it kept operating at a "LOSS", but creating cash flow to maintain its operations until this was achieved. ...
A discussion of factors to be considered when thinking of closing a business firm is given.