Positive and Negative Cash Flow
Cash flow is the movement of money into and out of a business. Positive cash flow occurs when the inflow of cash is greater than the outflow, whereas negative cash flow happens when the outflow of cash exceeds the inflow. Understanding positive and negative cash flow is crucial for assessing a company's financial health and sustainability.
When a company's operating cash flow or liquid assets are greater than the cash required to keep it afloat, it is said to have a positive cash flow. A corporation experiences a mix of cash inflows from selling goods and services and cash outflows from paying employees, paying rent, and other operational costs during regular business operations.
A company has a positive cash flow if its cash inflow exceeds its cash outflow. In other words, a positive cash flow indicates that more money is coming in than is leaving the business, which is necessary for long-term success.
The fundamental formula remains the same regardless of the kind of cash flow equation you use. Start with business income, such as cash from retail sales and dividend distributions. Subtract salaries, the price of raw materials, and payments for equipment before continuing. Your company has a positive cash flow for the given period if the resulting balance is positive.
As an illustration, consider a business that earns $250,000 in a quarter and spends $228,000 to run. For that quarter, the business would have a positive cash flow of $22,000.
When the amount coming in exceeds the amount going out over the same financial reporting period, there is positive cash flow. A company has a positive cash flow when its revenue exceeds its expenses.
When a business spends more money than it earns in a certain period of time, it has negative cash flow. A negative cash flow does not automatically mean loss, even though it does signal an imbalance in the revenue stream. It often reveals fleeting discrepancies between expenses and income.
For fledgling enterprises, negative cash flow is a frequent financial occurrence. Small business startup costs are high, and producing cash flows that outpace investments requires time and effort. Negative cash flow management is essentially inevitable.
Let's imagine, for illustration purposes, that a company's revenue for the month of August was $20,000 and its expenses came to $25,000. This indicates that the company experienced a $5,000 negative cash flow in August.
There are several reasons why a negative cash flow may arise, and some of the most typical are outlined below.
- Insufficient financial planning
- Unforeseen expenses
- Incorrect product pricing policies
- Investing too much or too often
- Inefficiency in accounts receivables management
- Pay attention to your investments and spending.
- Make a cash flow statement and perform regular forecasting.
- Regularly review your outgoing costs.
- Reduce expenses.
- Create an emergency budget to accommodate unexpected expenses.