IMPACT OF THE PRODUCT LIFE CYCLE ON A COMPANY'S CASH FLOWS

Impact of the corporate life cycle on a company’s cash flows 

All the product go through a series of phases called the product life cycle .The phases are :introductory phase , growth phase , maturity phase and decline phase .The introductory phase occurs at the beginning of a company’s life, when it is purchasing fixed assets and beginning to produce and sell products. During the growth phase, the company is striving to expand its production and sales. In the maturity phase, sales and production level off. During the decline phase, sales of the product fall due to weakening in consumer demand.
As in the following diagram, the phase a company is in effects its cash flows.

 In the first phase, we expect that the company will not be generating positive cash from operations. That is, cash used in operations will exceed cash generated by operations in the introductory phase .Also; the company will be spending considerable amounts to purchase productive assets such as buildings and equipment. To support its asset purchases the company will have to issue stock or debt. Thus, during the first phase we expect cash from operations to be negative, cash from investing to be negative and cash form financing to be positive.




                                                                                                                                                                  
                                                                                                                      

During the growth phase, we expect to see the company start to generated small amounts of cash from operations. During this phase, cash from operations on the statement of cash flows will be less than net income on the income statement. One reason income will exceed cash flow from operations during this period is explained by the difference between the cash paid for inventory and the amount expenses as cost of goods sold. Since the company projects increasing sales, the size of inventory purchases must increase .Thus, in the growth phase the company will expense less inventory on an accrual basis than it purchases on a cash basis. Also, collections on account receivable will lag behind sales and accruals sales during a period will continue to exceed cash collections during that period. Cash needed for asset acquisitions will continue to exceed cash provided by operations, requiring that the company make up the deficiency by issuing new stock or debt. Thus, in the growth phase, the company continues to show negative cash from investing and positive cash form financing.

During the maturity phase, cash from operations and net income are approximately the same. Cash generated from operations exceeds investing needs. Thus, in this phase the company can actually start to pay dividends, retire debt or buy back stock.

Finally, during decline phase, cash from operations decrease. Cash from investing might actually become positive as the company buys back stock and retires debt.


Hence this is how product life cycle impact on company’s cash flow.                           

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