Negative Cash Flow Explained - Why Is It Not Always Bad? (2024)

Why is Negative Cash Flow Not Always Bad?

A business could make net profit while having negative cash flow.

Earning revenue does not necessarily mean that the company has received cash immediately. The actual movement of cash may happen later.

For instance, a company sold goods and accrued profit on the income statement but did not receive the money yet. In this case, the customers agreed on a payment term of 60 days and will therefore pay 60 days later. This could also be due to operational issues.

Late payments from clients lead a company to incur losses in one month and profits in another. Also, a business may be making a profit, but its money could be tied in accounts receivables or hard assets. Besides, several mistakes and financial hurdles can cause companies to spend more than earn.

To know what causes negative cash flow, one must know some cash flow problems commonly faced by businesses.

So, when is negative cash flow bad for a business? To determine this, one needs to identify the type of negative cash flow that they are facing.

Three Types of Negative Cash Flow

Companies may face different types of negative cash flow depending on the situation or company size.

  1. Initial Negative Cash Flow

As the name says, this is common with new and growing businesses that often invest heavily in resources to increase brand awareness and authority in their respective market.

This can lead them to have excessive cash outflow, but these investments may offer high returns in the long term. This is a good sign for investors who seek companies offering high returns.

Since this kind of negative cash flow is temporary, it would not be a negative sign for a business.

A new company has several cash outlays and capital expenditures to develop its business operations. Many rely on loans or investments to fund their projects. Hence, it is totally possible for a growing company to have negative cash flow in its infancy.

Once the customer base is established, the company’s inflow should begin to exceed its outflow.

  1. Temporary Negative Cash Flow

Aside from initial negative cash flow, businesses may also incur negative cash flow for a temporary period during their operation.

Once the business is established, healthy, and profitable, the company may adopt an expansion strategy. To deploy this strategy, they may have to increase salaries, hire new employees, provide dividend growth to shareholders, and incur other overhead costs.

These additional costs could lead the business to incur negative cash flow but usually only for a short period.

Additionally, some businesses that experience seasonal growth may also incur temporary negative cash flow. Retail businesses with slow growth during low demand seasons and heavy merchandise purchasing for peak seasons commonly experience this.

  1. Chronic Negative Cash Flow

When an expansion cannot explain a negative cash flow, then there is something to be concerned about.

If a company is constantly reporting negative cash flow, it is either overinvesting or losing money over time which is certainly not a good sign. This can lead to unpaid bills and increased layoffs.

If the root cause of the problem is not addressed immediately, then it is unlikely for the business to sustain in the near future. Such negative cash flows can be highly damaging to a company’s business.

Thus, maintaining profit is not enough. Having a steady flow of cash is equally important. However, it would be wrong to judge a business’s success by merely looking at its negative cash flow.

Negative Cash Flow Examples

You won’t be surprised to see big company names when speaking of negative cash flow.

Netflix and Amazon are 2 of them.

Although their cash flow statement may give negative implications, upon deeper analysis, we learn the situation is otherwise.

Let’s read further to find out how!

Netflix – Its Growth with Negative Cash Flow

Netflix has been reporting negative cash flow in the past few years, mainly in 2019.

Negative Cash Flow Explained - Why Is It Not Always Bad? (1)

Quarterly Cash Flow Statement Report, 2019, Netflix

With the launch of other streaming platforms like Disney+ Hotstar and Apple TV+, the subscriber rate of Netflix decreased.

This led Netflix to grow its streaming collection to remain competitive in the market. Therefore, the cost of creating new content assets increased, taking a toll on Netflix’s negative cash flow.

Also, Netflix increased its investing activities during that period which further led to negative cash flows.There was a lot of buzz around Netflix having a cash burnout at the time in the market. Investors started losing confidence and Netflix was relying heavily on debt to finance its investment activities.

However, the management was confident that it will recover costs and close this cash gap in the upcoming 2 years. So, this cash imbalance was essential, according to Netflix, for it to gain profit in the later years. The extra cost involved in purchasing new assets should pay off in the coming years through an increase in subscribers.

Analysts also forecasted Netflix to become more profitable in international markets for the same reason. This was evidenced in 2020 itself as the company started incurring positive net cash flows.

With a 159.39% increase from 2019, it had an annual net cash flow of $3.195 billion in 2020.

Amazon – The Reality Behind its Negative Cash Flow

This eCommerce giant has also been incurring negative cash flow from financing and investing activities over the past few years as can be seen in the statement below.

Negative Cash Flow Explained - Why Is It Not Always Bad? (2)

Cash Flow Statement Report, 2013-2020, Amazon

To balance this large cash outflow, the company has been further financing through debt to inject liquidity.

Amazon’s situation may seem alarming at first but it is only upon deeper analysis that we find out why this is not the case. The major reason behind Amazon’s negative cash flow is its high capital expenditures and reliance on debt. However, this is simply because it reinvests its profit rapidly in innovative products.

Amazon intentionally keeps its profit low through internal investments like expanding its distribution network, building data centres and creating new lines of businesses like AWS cloud computing. This drive for constant innovation and expansion is what has also attracted growth investors to invest in the company.

The company further benefits from low profit through lower taxes. As a result, its free cash flow is incredibly high.

Upon looking at its balance sheet, we can see the company has an ample amount of cash and liquid assets available on hand.

Negative Cash Flow Explained - Why Is It Not Always Bad? (3)

Balance Sheet – Total Assets, 2017-2021, Amazon

While the company was reporting negative cash flow from investing and financing activities between 2018 to 2020, its cash and liquid assets were increasing.

Amazon’s payment cycle allows it to receive payments much earlier than it pays its suppliers, lowering its cash conversion days. So, it has more money coming in before the last quarter’s bills are due, keeping its free cash flow always higher.

Jeff Bezos considers free cash flow as the ultimate financial metric to evaluate the company’s financial success, mainly due to 2 key reasons:

  1. The cash available on hand enables Amazon to do more than it could otherwise. Aside from paying its suppliers, employees, and shareholders, the company uses this cash to invest in its future.
  2. Investors believe this to be a better valuation of a company’s stock than profit, determining its financial health.

Behind Amazon’s low profit and negative cash flow is a story of success.

These real business cases teach us how a cash flow statement alone is an inefficient and inaccurate representation of a company’s true profitability and performance.

If companies obtain financing while their cash flows are healthy, they can plan and prepare better for future expenses, instead of doing so after their cash flows are already negative.

Therefore, implementing strong cash flow management strategies is important for businesses to avoid negative cash flows.

Negative Cash Flow Explained - Why Is It Not Always Bad? (2024)

FAQs

Negative Cash Flow Explained - Why Is It Not Always Bad? ›

Yes, a profitable company can have negative cash flow. Negative cash flow is not necessarily a bad thing, as long as it's not chronic or long-term. A single quarter of negative cash flow may mean an unusual expense or a delay in receipts for that period. Or, it could mean an investment in the company's future growth.

Is negative cash flow always a problem of going concern? ›

One-off occurrences of negative cash flow are normal and inevitable in business. However, when negative cash flow stretches for months, you should be worried. If your expenses continuously outweigh revenue, it will become for you to meet up with running costs, break-even, and make a profit.

Is a negative free cash flow good or bad? ›

If a company is constantly reporting negative cash flow, it is either overinvesting or losing money over time which is certainly not a good sign. This can lead to unpaid bills and increased layoffs.

Why is it not necessarily bad for the operating cash flow to be negative for a particular period? ›

Negative cash flow occurs when a business spends more than it makes within a given period. Although negative cash flow means there is an imbalance in the revenue stream, it doesn't necessarily equate loss.

What does a negative operating cash flow indicate? ›

A negative figure in cash flow from operating activities indicates that the organisation has not been operating profitably and is short of cash to repay its creditors and to find the financing of its asset replacement/business expansion.

Is it normal for banks to have negative cash flow? ›

Banks may have negative operating cash flow for a few reasons. First, banks often have a large amount of non-cash items on their income statements, such as depreciation and amortization, which are added back to net income when calculating operating cash flow.

Why does Amazon have negative cash flow? ›

Amazon's situation may seem alarming at first but it is only upon deeper analysis that we find out why this is not the case. The major reason behind Amazon's negative cash flow is its high capital expenditures and reliance on debt. However, this is simply because it reinvests its profit rapidly in innovative products.

Is positive cash flow good or bad? ›

Positive cash flow indicates that a company's liquid assets are increasing. This enables it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing.

How do you fix a negative cash flow? ›

How to fix negative cash flow
  1. Create a cash flow statement. You won't be able to manage your finances without accurate, up-to-date financial statements. ...
  2. Review and reduce outgoing expenses. ...
  3. Find access to back-up cash. ...
  4. Automate y createsour accounting processes. ...
  5. Streamline your payments process.

What does a negative cash balance mean? ›

Definition of Negative Cash Balance

A negative cash balance results when the cash account in a company's general ledger has a credit balance. The credit or negative balance in the checking account is usually caused by a company writing checks for more than it has in its checking account.

What is the consequence of bad cash flow? ›

Poor cash flow management can lead to delayed vendor payments, missed growth opportunities, increased debt, and reduced employee morale. To address these challenges, businesses must identify cash flow issues early, implement strategies to improve cash flow, and utilize the right tools and resources.

What factor can negatively affect cash flows? ›

Expenses: The company's expenses, such as salaries, rent, and supplies, can have a significant impact on cash flow. If a company's expenses are greater than its revenue, this can lead to a negative cash flow. Accounts receivable: If a company extends credit to its customers, it will hav.

What does negative and positive cash flow indicate? ›

Cash flows describe the movement of money and liquid assets on and off a company's books as it makes various transactions. Positive cash flows mean that more money is coming in than going out of a company. Negative cash flows imply the opposite: more money is flowing out than coming in.

What is a synonym for negative cash flow? ›

nounas in spending in excess of revenue or income. budget deficit. compensatory spending. debt. debt explosion.

Should cash flow from operations be positive or negative? ›

Ideally, a company's cash from operating income should routinely exceed its net income, because a positive cash flow speaks to a company's ability to remain solvent and grow its operations.

How do you mitigate negative cash flow? ›

How to fix negative cash flow
  1. Create a cash flow statement. You won't be able to manage your finances without accurate, up-to-date financial statements. ...
  2. Review and reduce outgoing expenses. ...
  3. Find access to back-up cash. ...
  4. Automate y createsour accounting processes. ...
  5. Streamline your payments process.

Is it possible to have a positive cash flow but to be in financial trouble? ›

If a company has a net loss for the period and has a large depreciation expense amount added back into the cash flow statement, the company could record positive cash flow, while simultaneously recording a loss for the period.

What is most likely to cause a cash flow problem? ›

Late Payments from Buyers

This is one of the biggest cash flow issues affecting businesses. As businesses need to pay expenses, a delayed payment reduces cash inflows while adding pressure to pay bills on time.

What are the risks of not having a cash flow forecast? ›

If you don't forecast your cashflow, it makes it almost impossible to make informed business decisions, plan for change and know how you can enable business growth.

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