What Does Negative Cash Flow Mean?
If a company has negative cash flow, it means that the company has spent more cash compared to the amount of cash that it has earned in a particular accounting period. This indicates that the sum of cash inflow of the business is lower than the amount of cash outflow in that period, which can be a warning sign to the company’s financials.
Thus, as we can see, cash flow (Also see Why Do We Need Cash Flow Statement?) is one of the important aspects that we should not neglect when analyzing the financial health of a business. Before we get to know the cash flow of a business, we need its cash flow statement. Do not worry too much if you are a business owner who does not know how to generate this statement. The experts from the bookkeeping service in Singapore are always there to help.
In short, having a negative cash flow means that the business spent more cash than the cash generated. Such a situation can be quite common among the companies that are in the growth phase as they need to spend a lot of money to set up its production line, to market or advertise its products or services, or to attract customers. To support these activities or to treat the problem of negative cash flow, business owners (Also see 6 Accounting Tips For New Business Owners) should go for debt funding or inject more funds to the business.
The process of calculating the cash flow may be a bit complicated. If we look at it in the simplest form, the calculation of cash flow actually means that we need to deduct the sum of cash outflow from that of the cash inflow. If the resulting amount is negative, then it means that the company’s cash outflows have exceeded its cash inflows.
Most companies around the world have probably faced this situation before. This may not last long as it may be a condition that arises due to the challenges that the company will always face at a particular time in a year. Also, when new competitors have come into the market, or when there is any regulatory changes or natural disasters, the cash flow of a company may be affected too.
In some cases, having a negative cash flow may indicate that the company is attempting to expand its business and how much effort they have put into the expansion. The execution of expansions and evolving plans are vital for the development and survival of the business in this fast-changing era. Thus, it is normal for a company to have a negative cash flow if it is in the growing and evolving state.
Even though having a negative cash flow are not necessarily bad, yet in some cases, this will still bring some disadvantages to the business. Negative cash flow may result in a cash crunch, which means that the lack of cash has influenced the business operations. Thus, the company may delay the payments to its suppliers and even the employees. Such a situation will affect the company’s relationship and reputation among the suppliers and employees.
Besides, if the company chose to fund the negative cash flow (Also see How to Manage Your Business Cash Flow?) by debt funding, it has to pay the money back along with the associated interests. This may bring an impact to the profitability of the business in the long run. If the company decided to obtain funds by equity infusion, its equity ownership might be diluted, hence affecting the power of decision making of the company’s management.
In conclusion, investors do not need to worry too much about negative cash flow as this is not necessarily a bad indication, except if such a situation continues for a long time. This is a normal condition in companies that are seeking for opportunities for them to develop and evolve. However, investors should still be careful if negative cash flow (Also see Preparing the Statement of Cash Flow) occurs as this may also be a sign that the business did not execute the business plans well or there are not many opportunities for the company to develop and grow. This may be a sign of fraud in the business too.