Negative cashflow Essay
What does it mean when cash flow from operations on a company’s cash flow statement is negative? - Negative cashflow Essay introduction?? Does this indicate any negative message to the company? Explain with detailed interpretations.
Negative cashflow from operations arises when cash outflows from operating activities is more than cash inflows. Cash inflows from the said activity includes collection of income from operation and collection of receivable while outflows pertains to the purchase of raw materials, building inventory, advertising and shipping of products, payments of other operating expenses.
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Most probably, the negative cashflow from operations means that the business is incurring losses which indicate a negative message to the company due to the reason that every business organization operates for profit. A company desires to recover its investment plus receive a return on that investment. A company invests cash in non-cash resources in order to produce a product or service for which it receive cash inflows, with the amounts returned hopefully in excess of the amount invested.
Investment and lending decisions are made with the expectation of eventually increasing cash resources. Potential investors always look at the profitability of a company, they want to make sure that the company is financially sound. An investor hopes to recover the initial investment, receive a return on that investment in the form of cash dividends, and ultimately sell the investment for more than its cost. Likewise, potential lenders/creditors is much concern on the company’s ability to repay. Creditors seek to recover their cash outlays by repayment of loans and to increase cash resources from interests payments. In making their decisions, investors and creditors must see to it that the company’s operation is profitable and liquid.
Stice, E., Stice, J., & Skousen, F.(2004). Intermediate accounting. Australia : Thomson/ South-Western.