That being said, it is okay to have a net gain in cash flow of financing activities at times
Your net cash flow appears at the bottom of your statement of cash flows and is a total of your cash flow of operating activities, your cash flow of investment activities, and your cash flow of financial activities. Ideally, you want a net increase in cash flow, which shows that your company brought in more money than it spent.
While you want a positive cash flow, you may not want your cash flow to be too positive. Seem counterintuitive? Here’s why.
If you have an incredibly high cash flow, that is extra money that you can be (and should be) investing back into your business. It’s important to strike the balance of maintaining a positive cash flow and using that positive cash flow to ensure that your business grows and makes even more money in the future.
Your cash flow of investing activities shows how much money you’ve spent on purchasing and maintaining fixed assets or on selling assets
Your operating cash flow shows how much money your company is making or losing on everyday business operations. Business operations are the bread and butter of your business, so it makes sense that you want your operating cash flow to be a high, positive number. You always want to see this number increasing over time.
If your operations appear as a net loss instead of a net increase, you may want to reevaluate your business practices. Increase prices, don’t reorder unpopular inventory, streamline processes to save time and money on payroll, incentivize customers to pay their invoices in a timely manner – do whatever it takes to spend less and bring in more so that your business can flourish.
That being said, it’s important to not only know what your operating cash flow is but to analyze why your operating cash flow is negative or positive. There may be some months that you have a negative operating cash flow, and that may not be a bad thing.
Let’s say you run a seasonal business and you spend a large sum on purchasing inventory to prepare for the holiday season. Because of this, your September cash flow statement shows a net loss on operating cash flow. However, during October, November, and December, you bring in tons of cash selling the inventory you purchased. You wouldn’t have been able to make strong sales or have such a positive cash flow during the holidays without that extra inventory.
In this case, one month of negative cash flow led to three months of incredibly positive cash flow, which was more than worth it. You only have to start worrying if your operating cash flow is negative again and again.
Typically, most growing businesses will have a net loss on cash flow of investing activities. While that may sound ominous, it really means that you are actively investing in new fixed assets to expand your business and replacing old equipment to help your business run more efficiently. This is a good thing.
Your cash flow of financing activities shows the cash used to pay off your business’s existing debts and any new financing or loans received.
Generally, you want to see a negative net cash flow from financing activities. This means that you are paying off existing debt and paying dividends to shareholders.
A positive net cash flow of financial activities means your business has gained cash from investors or secured a new business loan. While some business owners may assume that debt is always a bad thing, there are several good reasons for applying for a business loan: