Final answer:
It is true that many profitable firms fail due to a lack of cash because profitability does not ensure sufficient cash flow. Start-up firms raise capital through various means such as private investors and IPOs. Established firms are more likely to secure bank loans, and bonds are a form of corporate borrowing.
Step-by-step explanation:
It is true that many profitable firms fail because of a lack of cash. Profitability does not necessarily equate to having adequate cash flow. Firms need cash to pay for expenses such as inventory, payroll, and rent, which they cannot always cover with immediate profits. In fact, start-up firms frequently seek financial capital through various means to sustain operations and fuel growth.
Common ways to raise capital include private investors, bank loans, issuing bonds, or through an Initial Public Offering (IPO). Profitable firms may also face cash shortfalls due to rapid growth, unexpected market changes, or poor cash management, which emphasizes the importance of cash flow management.
Firms often cannot rely solely on profits for capital because those profits might be insufficient for expansion or may arrive too slowly. Moreover, outside investors can provide not just funds, but also expertise and industry connections. Established firms are generally more attractive to banks for loans due to their proven track records, which reduce the banks' lending risks. Finally, a bond is a debt security through which an investor loans money to an entity, typically corporate or governmental, which borrows the funds for a defined period at a variable or fixed interest rate.