What strategy might a firm use if it consistently operates below its cash break-even?

When a firm consistently operates below its cash break-even point, it indicates that it is not generating enough revenue to cover its cash expenses. In this scenario, reducing fixed costs becomes a logical strategy. By cutting fixed costs, the firm can lower the amount it needs to generate in revenue to reach break-even. This can involve measures such as renegotiating lease agreements, reducing administrative salaries, or minimizing other overhead expenses.

Lowering fixed costs directly impacts the firm's bottom line, allowing it to move closer to achieving or surpassing the break-even point without necessarily increasing its revenue immediately. This approach helps create a more sustainable financial structure, especially in times of low sales or economic downturns.

In contrast, increasing variable costs would further erode profit margins, heightening the financial pressure on the firm. Heightening dividend payouts would generally divert cash away from operational needs, compounding the issues of insufficient cash flow. Expanding equity financing could bring in additional funds but might not address the underlying operational inefficiencies that are preventing the firm from reaching cash break-even. Reducing fixed costs is therefore the most appropriate strategy to improve cash flow and enhance the firm's financial stability.