What deos it mean when cash flow from operations on a companys cash flow statement is negative?
Cash Flow should be used in conjunction with a Profit & Loss Statement. Negative cash flow does not necessarily mean that your company is not profitable – but it does mean that you might go out of business. Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. While, a sale may have been secured and goods delivered, the related payment may be deferred as a result of giving credit to the customer. At the same time, payments must be made to suppliers, staff etc., cash must be invested in rebuilding depleted stocks, new equipment may have to be purchased etc. This means that you may make a lot of money from this sale – but you will need cash to pay for the material, labor and overhead associated with the sale. In summary, you need to understand the income statement and the cash flow in order to judge a company’s health.
