And, you agree to your vendors’ payment terms so you know when to pay them. You can try to adjust either of these types of payment terms to improve cash flow. Let’s say we’re creating a cash flow statement for Greg’s Popsicle Stand for July 2019. If we only looked at our net income, we might believe we had $60,000 cash on hand. In that case, we wouldn’t truly know what we had to work with—and we’d run the risk of overspending, budgeting incorrectly, or misrepresenting our liquidity to loan officers or business partners. For small businesses, Cash Flow from Investing Activities usually won’t make up the majority of cash flow for your company.

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on

3 Accounts and notes payable

If checks are created but not released by year-end, reverse the payment. Payables are relieved when payment is made (checks are printed and mailed, or electronic payments are processed). PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. In our examples below, we’ll use the indirect method of calculating cash flow.

Then show cash as one amount on the balance sheet ($1,345,000). Liabilities include current bills, payments still owed on some assets like cars and houses, credit card balances, and other loans. A balance sheet lists a company’s assets, liabilities, and shareholders’ equity at a point in time, typically at the end of a period, such as the end of a quarter or year. However, cash cannot be a negative number on the balance sheet.


If you use accounting software, it can create cash flow statements based on the information you’ve already entered in the general ledger. When your cash flow statement shows a negative number at the bottom, that means you lost cash during the accounting period—you have negative cash flow. It’s important to remember that long-term, negative cash flow isn’t always a bad thing. For example, early stage businesses need to track their burn rate as they try to become profitable. One of the most common downfalls for businesses at any size or age is overinvesting. You overinvest when you spend an excessive amount of cash on non-business-critical services, projects, or products.

Create an emergency budget to accommodate unexpected expenses

This is because these accounts are showing reductions to the accounts they off-set. Now, let’s suppose XYZ Corporation needs to pay an unforeseen immediate liability of $2,500. This payment would decrease the Cash account from $1,000 to -$1,500 ($1,000 – $2,500). In other words, negative shareholders’ equity should tell an investor to dig deeper and explore the reasons for the negative balance. Certain types of vendors may be willing to give you a longer amount of time to pay invoices. Or, see if the vendor will give you a payment plan and split the balance due into smaller amounts.

Understanding Net Cash

For example, if you have a monthly software subscription that you no longer use, cancel it. If you have an expensive utility bill, consider more economical energy alternatives. The idea is to eliminate anything that isn’t necessary for your business success so that you can reserve more money for emergencies. Cash flow measures all expenses that go in and out of your business within a specified period. I consult with other CPA firms, assisting them with auditing and accounting issues.

What does negative cash flow mean for your small business?

Ultimately, these payments only drain funds rather than boost profitability. Overinvestments act against your company’s best interests and shareholders and can quickly result in negative cash flow. Negative balance refers to a situation in which you have made checks for more money than is available in your checking account, resulting in a credit balance of negative funds. If the balance sheet contains a positive cash balance in assets and a cash overdraft in liabilities, provide a reconciliation at the bottom of the cash flow statement (or in a disclosure). In the reconciliation, show the composition of the balance–one line titled Cash, one line titled Cash Overdraft, and a total line titled Total Cash (Cash Overdraft). To highlight the difference between the two statements, we can look at Apple’s investing activities, which included approximately $2.1 billion dollars in purchases of property, plant, and equipment.

The beginning and ending cash–in the cash flow statement–should include the negative cash amounts. A negative cash balance in the general ledger does not mean that the company’s bank account is overdrawn. Let’s assume that a company writes checks for $100,000 and mails them at the end of the day to suppliers in another state. Those checks might not clear the company’s bank account until three or four days later. Therefore, it is possible that the company’s Cash account shows a negative $40,000 but at the bank the company’s checking account balance could have a positive balance of $60,000. If the company deposits at least $40,000 tomorrow morning, the bank balance will be large enough for the bank to pay the $100,000 of checks it had written.