Does a Negative Cash Flow Mean a Company's Financial Performance Was Bad?

by Tiffany C. Wright Google

Financial statements, including the cash flow statement, provide the detail on a company's financial performance. To fully understand a company’s ability to cover expenses and make capital expenditures, an owner must regularly review the business’s cash flow. Companies with positive cash flow can reinvest the cash. Those with negative cash flow cannot.

What Is Cash Flow?

Cash flow is the amount of cash and cash equivalents entering and leaving a company. Cash flow is what is actually available to pay expenses and make investments. A business derives its cash flow from operations, meaning its regular business activities, as well as from investing and financing. The cash flow statement records these cash inflows and outflows for a company during a specific time frame.


On a cash flow statement, the operational cash flow clearly shows whether the way a company creates and manages its earnings provides it with sufficient cash to cover all operational expenses. If this cash flow is negative, the company cannot cover operations solely from running the business. Negative operational cash flow could signify a growing company that is hiring personnel, or it could signify a collections problem or poor debt structure.

Financing and Investing

When operational cash flow is negative, a company must generate positive cash flow from its financing or investing activities. A company generates financing cash flow comes from obtaining new debt, selling stock, retiring debt, or paying dividends. It obtains investing cash flow from selling company assets, or from purchasing equipment or property. Growing companies typically show positive financing cash flow from investors or lenders, but negative investing cash flow from capital expenditures. Struggling companies may show significant positive investing cash flow from the sale of assets to cover operations and debt repayments.


EBITDA is an accounting term that means "earnings before interest, depreciation and amortization." It is another often-used measure of business cash flow. Analysts consider EBITDA useful because it looks at a company's cash irrespective of its debt load. A company with low net income and minimal depreciation and amortization, yet a high EBITDA, is carrying significant, expensive debt. Companies with negative EBITDA will encounter financial difficulties unless they obtain cash from non-operational sources.


Healthy growing companies will pursue suitable debt or equity financing in advance of its need. Healthy mature companies generally have positive EBITDA and operational cash flow. Companies in a turnaround situation will show negative EBITDA and operational cash flow, and minimal new financing cash flow. Therefore, negative cash flow does not always mean that a company's financial performance was bad, but it is always a sign that a company needs to take steps to better manage its cash or to access cash from other sources.

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