How do late payments impact cash flow?

Late payments have a significant negative impact on cash flow, which is why this is the correct choice. When customers do not pay their invoices on time, it delays the receipt of cash that a business depends on for its day-to-day operations. This can lead to cash flow shortages, making it challenging for companies to cover their operational expenses, such as paying suppliers, employees, and other overhead costs.

Cash flow refers to the inflow and outflow of cash within a business and is crucial for maintaining liquidity. When payments are delayed, the expected cash inflow is postponed, which can lead to a cash crunch. Companies may find themselves in a position where they cannot pay their bills on time, leading to additional fees, a damaged reputation with suppliers, and potential loss of creditworthiness.

In contrast, late payments do not improve profitability or ensure greater inventory levels; instead, they can create financial strain. A healthy cash flow is essential for taking advantage of business opportunities, investing in growth, and managing unexpected expenses. As such, timely payments from customers are vital for overall business health and longevity.