What is a Negative Cash Flow?

When a company spends more than it receives during a set period of time, typically a quarter, the company is said to have a negative cash flow. Negative cash flows are often viewed as indicators of financial ill health by people who are assessing companies to determine whether or not to invest in the company. However, many things can influence cash flow, and a negative cash flow should not necessarily be seen as a black mark because there are many reasons for a company to experience a temporary negative cash flow.

Publicly traded companies send out documentation of their financial circumstances to their shareholders so that the shareholders can get an idea of how well the company is doing. This documentation typically includes a cash flow statement, which breaks down the cash inflow and outflow and shows the net change in cash flow, which can be positive or negative. The cash flow statement typically includes operating, financing, and investing activities, each of which can generate positive or negative cash flow.

The operating activities of a company involve the company's core purpose, such as selling a product or service. Usually, operating activities generate a cash inflow. Financing activities involve the exchange of funds between a company and creditors or debtors, and they may be positive or negative. For example, a company servicing debt would be paying out a lot, while a company which had just financed a major endeavor might have a positive flow of cash. Likewise, a company which just paid a dividend to shareholders would probably record a negative number in this column. The investing activities refer to the company's investment in other companies and goods, or to investments made in the company by others.

When a company records negative cash flow, it may be because the company is struggling, or it may be because the company had a number of expenses which upped outflow. Cash flow is not necessarily always linked to profit, and companies can actually record negative cash flow for several periods and still be profitable. Of greater concern are radical changes in cash flow between periods, or a consistent and prolonged period of negative cash flow, which suggests that a company may be overreaching.

The term “negative cash flow” can be used in reference to personal finance as well as the corporate world. When people experience negative cash flow as individuals, it means that they are spending more money than they are earning, which can result in long term debt and serious financial problems.