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Bethany Taylor

Cash Flow: Is Negative Cash Flow Always Bad?

Updated: Feb 19

Cash flow can be positive or negative; neither is necessarily good or bad. It needs to be viewed in the context of the business as a whole.



The positive and negative flow of cash flow

Often business owners want to find a clear-cut metric to determine at a glance if their business is succeeding or failing. They often look at their profit to be that metric. After all, if their business is making a profit, it must be succeeding; if it’s not making a profit, then, at the very least, it’s struggling. Perhaps a better metric of the overall health of your business is Cash Flow.


Cash flow, at its most basic, is the total change in the amount of cash in a bank account for a given period. Cash flow can be positive or negative depending on whether more cash flowed into the account than flowed out and vice versa. Interestingly, it is possible for a business to be profitable and have a negative cash flow, or conversely, to not be profitable, yet have a positive cash flow. As such, positive or negative, as it relates to cash flow, does not automatically translate to “good” and “bad” or success and failure. 


Cash Flow can be positive or negative; neither is necessarily good or bad.


Cash flow is seldom as cut and dry as business owners would like it to be. A negative cash flow in a predetermined period can be a sign of health for a business, while a positive cash flow can indicate a potential problem. Looking strictly at the numbers often does not give the whole picture.  

For instance: 



Company A cash flow table for January

 

At a glance, this is a good thing. Company A now has more liquid assets in its bank account. However, digging a little deeper, the story of what transpired in January goes something like this: after payroll and overhead bills were paid, the payables for inventory came due. 


In addition, an ice storm rolled through leading to a broken boiler, frozen pipes, and resulting flooding as pipes burst and thawed. The need to replace the boiler, in addition to the plumbing costs and subsequent renovations from burst pipes, left the company short on cash.


As a result of the cash flow crunch, Company A took out a $100,000 line of credit from its bank to cover costs. The unexpected bills won’t come due until February, March, or further down the line, so the “additional” cash from the loan remained in the bank account at the end of January giving the appearance of increased (positive) cash flow.


But now the company is saddled with an additional loan that needs to be paid back over time that it might not be financially prepared to handle. 

In other words, the adjusted Cash Flow looks like this: 



Company A's adjusted Cash Flow for January

 

It is important to take note of the context of the assets in the account. Often, small business owners make the mistake of seeing the “additional” cash in the account and think it is either profit or available for use. However, the additional cash is already allocated and not free to use. In addition, Company A is really down $50,000 for the month of January and we should look at whether this is sustainable. 

In contrast: 



Company B's January cash flow

 

Company B appears to have a negative cash flow for the month of January. However, it paid off the remainder of its small business loan in January and then bought additional assets that will enable it to expand its territory and increase sales and profitability in the long run. 


In general, if a business does something to increase its cash flow in a given time period, but this action decreases future cash flow, the positive cash flow is a sign of a problem in the business’s overall health. Whereas, a negative cash flow that increases the company’s ability to have consistent positive cash flow in the future, is a sign of health. 


Many factors drive cash flow

Many factors drive cash flow, and a single month or quarter should not be taken as the sole metric of the health of a business. It is helpful for business owners to know the goals for their company, understand cash flow drivers, and recognize the benefits of financial flexibility. Building liquid assets through positive cash flow will enable a business to grow and expand, and build wealth for the owner and its employees, all while being able to weather the financial storms of recessions and unexpected expenses.  


Unfortunately, there are many stories of profitable businesses that went bankrupt between 2019 and now due to the far-reaching effects of Covid on the economic landscape of the country. It was a highly unusual circumstance that brought about rapid changes in how companies did business, and it is difficult to predict or even prepare for something of that magnitude.


Consistent Positive Cash Flow: indicates stability


As a rule, consistent positive cash flow is a better indicator of the sustainability of a company and its ability to adapt and grow, but this does not mean that negative cash flow for a given period automatically means a business is failing. It could mean the owner is investing in the future of the business, overcoming an unexpected challenge, or even taking a long-deserved, hard-fought break while the business continues to thrive. 

 

 



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