How is it possible to have negative cash flow?

[luvya]

I think I have a clue about it, but it's very vague. It's just so seemingly impossible for a business to spend more cash than it takes in....mmm, can anyone give me a hand on this?

 

[Mill]

Loans.

 

[Orsorum]

Credit is your friend. : )

 

[J3anyus]

Originally posted by: luvya
It's just so seemingly impossible for a business to spend more cash than it takes in

It's pretty simple. A business has $20,000 to spend and buys $30,000 in inventory on credit anticipating mass sales. Said business then fails to sell anything that they just bought. Now they have made a negative profit of $10,000.

 

[Crusty]

Just look at the US.....

<puts on flame suit>

 

[Colt45]

When you buy (raw goods, wages, machinery, etc) and/or owe more than you sell, you owe money. pretty easy concept, no?

 

[luvya]

Care to elaborate? Borrow money from equity market and loans are also reflected on the cash flow statement, so that should cancel out, no? I just want to understand the intuition behind it. Spend more cash than you take in?

 

[luvya]

Originally posted by: Colt45
When you buy (raw goods, wages, machinery, etc) and/or owe more than you sell, you owe money. pretty easy concept, no?

ok

not what I am asking though

 

[luvya]

I guess I shouldn't ask an accounting question on a tech forum

my lesson learned

 

[Orsorum]

Originally posted by: luvya
I guess I shouldn't ask an accounting question on a tech forum

my lesson learned

How can a company have a negative balance on its books?

 

[TheGameIs21]

Originally posted by: luvya
Care to elaborate? Borrow money from equity market and loans are also reflected on the cash flow statement, so that should cancel out, no? I just want to understand the intuition behind it. Spend more cash than you take in?

Yes... They spend more (on credit) than they take in (in cash or credit). Don't overanalyze it.

 

[FeathersMcGraw]

Originally posted by: luvya
Care to elaborate? Borrow money from equity market and loans are also reflected on the cash flow statement, so that should cancel out, no? I just want to understand the intuition behind it. Spend more cash than you take in?

Borrowing is a net zero only initially; interest charges over time accumulate additional charges on the negative side of the balance sheet.