How can a company with a net loss show a positive cash flow?

Definition of Net Loss

A net loss occurs when a company's revenues and gains are less than its operating expenses, other expenses and losses. The net loss or net income is reported on the company's income statement.

Keep in mind that under the accrual basis of accounting:

  • Revenues are reported in the accounting period in which they are earned (as opposed to when cash is collected)
  • Expenses are reported in the accounting period when they best match the revenues (e.g. cost of goods sold) or in the accounting period when they are used up (not when cash is paid out)

Definition of Positive Cash Flow

Generally, a positive cash flow refers to a positive net inflow of cash from operating activities, which is shown on a company's statement of cash flows (SCF) or cash flow statement. [The SCF should be distributed with a company's income statement and balance sheet.]

The cash from operating activities almost always begins with the company's accrual accounting net income or net loss for the accounting period. The net income or net loss amount is then adjusted to the cash amount. It is in this section of the SCF where you will find the reasons why a company can have an accounting net loss but have a positive net cash inflow.

Example of Net Loss But a Positive Cash Flow

A common adjustment to a company's accrual accounting net income or net loss is depreciation expense. Depreciation expense was included on the income statement and reduced the company's net income (or increased its net loss), but the depreciation amount did not involve a current period cash payment. For example, if a company purchased equipment in the previous year for $2,100,000 and is depreciating the equipment over seven years, the depreciation expense for the year of the income statement might be $300,000. The $300,000 accounting entry debited Depreciation Expense and credited Accumulated Depreciation. As you can see, not a penny left the checking account in the year of the income statement. (All $2,100,000 of cash left the checking account in the previous year.) If the company's income statement reported a loss of $50,000 after the $300,000 "non-cash" depreciation expense, the company's cash may have actually increased by $250,000.

There are many other SCF adjustments to the company's net income that are less significant than depreciation, such as:

  • Sales of product and/or service revenues that occur in December, but the cash is received in January
  • Expenses that occur in December, but cash is paid out in January
  • Prepayment of a six-month insurance premium in December, but 5/6 of the amount is expensed during January through May of the following year
  • Purchase of inventory in November with payment to the supplier in December, but sold in January through March of the following year

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