What does a negative figure in the cash flow from operating activity indicate? (2024)

FAQs

What does a negative figure in the cash flow from operating activity indicate? ›

If your receivables less your payables results in a negative number, you have negative cash flow from operations. The amount of your income is less than the expenses you must pay. You're making too little sales or you're spending too much.

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.

A negative OCF indicates that a company is not generating sufficient revenues from its core business operations, and therefore needs to generate additional positive cash flow from either financing or investment activities.

Operating with negative cash flow isn't necessarily a bad thing. Even giant, international and world-famous corporations operate at a loss for some months or years. Sometimes, they even lose money and experience negative cash flow on purpose to invest in something that will produce massive profits in the future.

Negative CFF numbers can mean the company is servicing debt, but can also mean the company is retiring debt or making dividend payments and stock repurchases, which investors might be glad to see.

If you spend too much on materials and labor, or if your customers don't pay you quickly enough, your operating cash flow could be negative and you'll have to develop other strategies to pay your bills.

Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, otherwise, it may require external financing for capital expansion.

A high number, greater than one, indicates that a company has generated more cash in a period than what is needed to pay off its current liabilities. An operating cash flow ratio of less than one indicates the opposite—the firm has not generated enough cash to cover its current liabilities.

A good operating cash flow margin is typically above 50%. If a company has an operating cash flow margin of below 50%, this suggests that the company is not efficiently making sales into cash, and instead, may have high expenses.

Why would companies have negative operating cash cycle? ›

A negative cash conversion cycle means that inventory is sold before you have to pay for it. Or, in other words, your vendors are financing your business operations. A negative cash conversion cycle is a desirable situation for many businesses.

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.

In general, companies that have a positive operating cash flow have more liquidity than those with a negative operating cash flow. If your cash flow from operations is negative, there are several ways your business can improve it. These include: Reduce operating expenses.

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.