Profit but Negative Cash Flow

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Profit but Negative Cash Flow
Kim Mclaughlin
What managerial assessments may you make about an organization that has a profit and a negative cash flow in the same accounting period?

Profit But Negative Cash Flow
Ghassan Ghanem, Member
I believe that this company is having a weak treasury management as the negative cash flows highlights this fact.
Another cause could be is that the company is over investing a lot of its available funds in current as well as fixed assets.
Or, the cash outflows for debt service could be one of the reasons.
It could be a mix of the above mentioned.
Anyway, the ultimate reason could be disclosed upon analyzing the financial statements.

Profit But Negative Cash Flow
Babacar Diouf, Member
I join Mr Ghassan Ghanem's idea and I hope that your operating profit is positive, otherwise you go straight in to the wall. Try to play with deadlines customer-supplier, it can help you. Conveniently, the budget management could be a solution to the problem of liquidity. He allows to anticipate the future and to correct the imperfections through a good decision-making.

Profit But Negative Cash Flow
Francesco Smeragliuolo, Member
I believe that we have to clarify what kind of cash flow you are analyzing?
  • In case your analysis concerns the OPERATIVE CASH FLOW, the problem is the management of working capital.
  • In other cases I agree with @Ghassan Ghanem. In such case you are analyzing the cash that you have indicated in balance sheet.
So note the different types of cash flow (operative cash flow, investing cash flow, financing cash flow), because there will be different variables to check.

Types of Cash Flow and Their Calculation
Jaap de Jonge, Editor
@Francesco Smeragliuolo: Indeed. Here is some more info about these 3 types of cash flow calculation:
  • CASH FLOW FROM OPERATIONS measures the cash generated from the core business or operations of the business.
    Formula: Cash Flow From Operations (CFO) = Net Income + Depreciation & Amortization +/- 1 Time Adjustments +/- Changes in Working Capital
    Cash Flow From Operations is a line item in the Cash Flow Statement.
  • CASH FLOW FROM INVESTING measures the purchases and sales of long term investments including items such as capital expenditures, acquisitions, or investments in other securities such as stock and bonds.
    Formula: Cash Flow From Investing = Net Capital Expenditures of Property, Plant, and Equipment (PPE) +/- Long Term Investments
    Cash flow from investing activities will usually be negative. For most companies this represents investment in itself. Cash flows would only be positive when investments are disposed of.
    Cash Flow From Investing Activities is a line item in the Cash Flow Statement.
  • CASH FLOW FROM FINANCING measures the activities that fund the company and stakeholders (debt and equity holders). These activities include issuing or buying back stock, issuing or repurchasing debt, and paying dividends to shareholders.
    Formula: Cash Flow From Financing = Cash Received From Issuance of Equity or Debt Dividends to Shareholders Purchase of Outstanding Equity or Debt
    Cash Flow From Financing Activities is a line item in the Cash Flow Statement.
The sum of the three above makes up the TOTAL CASH FLOW for the entity.


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