Variable costs have a direct impact on a business's cash flow. Since these costs change with production levels, they can cause fluctuations in cash flow, which needs to be managed carefully. For instance:
High Production Periods: During periods of high production, variable costs will increase, requiring more cash outflow. Low Production Periods: Conversely, during low production periods, variable costs will decrease, freeing up cash flow.
Effective cash flow management involves anticipating these fluctuations and planning accordingly.