Question

You have stated several reasons as to why a company could have negative cash flows. Many start-up companies experienced negative cash flows during the first few years of their operations. Would you invest in a start up company if it has negative cash flows for the first three years of its operations, and in the 4th year the company is still expecting a negative cash flow?

Answer 1

Cash Flow Statement has 3 main components:

1. Cash Flow from Investing Activities

2. Cash Flow from operating activities

3. Cash flow from financing Activities

Here we have to discuss about cash flows from financing activities.

Cash Flow Statement is a Financial Statement that summarizes the amount of cash & cash equivalent entering and leaving a company.

The Cash Flow Statement shows how the company manages its cash flows and also complements the Balance Sheet and Income Statement.

Investing activities means any outflow of cash or sources of cash from company for example Purchase of Fixed assets, Loan taken, Sale of Fixed assets, Purchase of equity shares etc.

Every Investor would love to see positive cash flows from a company's operations but having negative cash flows from investing activities is not always bad and needs further evaluation before making any decision.

Its Entirely possible for a growing company for having Negative cash flows from investing activities for example if a growing company decides to invest in fixed assets that will have negative impact on cash flow from investing activities but its not negative. Even Big establishments makes Investments in Long Terms assets such as property and equipment from time to time and that leads to negative cash flows from investing activities.

So its important to analyze and entire cash flow statements and all of its components to determine whether the negative cash flow is truly negative sign or positive sign.The best way to analyze company's negative cash flow is to calculate the company's free cash flow.