Is It Possible to Have Positive Cash Flow and Negative Net Income?

Can a Company Have Positive Cash Flow and Negative Net Income?

Cash flow is the net amount of cash and cash equivalents being transacted in and out of a company in a given period. If a company has positive cash flow, the company's liquid assets are increasing. Net income is the profit a company has earned, or the income that's remaining after all expenses have been deducted. Net income is commonly referred to as the bottom line since it sits at the bottom of the income statement.

Yes, there are times when a company can have positive cash flow while reporting negative net income. But first, we'll need to explore how cash flow and net income relate to each other in the financial viability of the company.

Understanding Net Income and Cash Flow

Net income is calculated by subtracting the costs of doing business, including expenses, taxes, depreciation, and interest on debt from total revenue. If net income is positive, the company is liquid and has a higher probability of paying off its debts, paying dividends to shareholders, and paying its operating expenses. 

Cash flow is reported on the cash flow statement, which shows where cash is being received and how cash is being spent. Cash flow is the net amount of cash and cash equivalents being transacted in and out of a company in a given period. If a company has positive cash flow, it means the company's liquid assets are increasing.

Real-World Example of Positive Cash Flow and Negative Net Income 

Below is the cash flow statement for JC Penney Inc. (JCP) as of Q2 2018. The company later filed for bankruptcy in the summer of 2020, partly due to its persistent negative cash flow problems.

Looking at the company's filings, net income is carried over from the income statement and is the starting point for calculating cash flow. From the net income amount, cash transactions for the period are either added or subtracted. 

• JC Penney had a negative net income (or loss) for the period of $78 million, highlighted in red. 
• However, at the bottom of the statement, highlighted in green, the company posted a positive cash position of $181 million. 

How can that be? 

• We can see, highlighted in blue, that JC Penney received an influx of cash from borrowings of a credit facility along with additional cash from new long-term debt. 
• In other words, the company still posted a loss for the period but received enough cash from borrowing to offset the loss and create positive cash flow. 

Depreciation

Depreciation is an accounting method that allocates the cost of a fixed asset over its useful life. Depreciation accounts for declines in the value of the asset and spreads the expense of it over the years of the useful life of that asset. Depreciation helps companies avoid taking a huge deduction in the year the asset is purchased, allowing companies to earn revenue from the asset. 

Net income is calculated by deducting a company's expenses, and depreciation is one of those expenses. However, since depreciation is an accounting measure, it is not an outlay of cash. As a result, depreciation expense is added back into the cash flow statement when calculating the cash flow of a company.

If a company has a net loss for the period and has a large depreciation expense amount added back into the cash flow statement, the company could record positive cash flow, while simultaneously recording a loss for the period. 

Sale of an Asset

If a company sells an asset or a portion of the company to raise capital, the proceeds from the sale would be an addition to cash for the period. As a result, a company could have a net loss while recording positive cash flow from the sale of the asset if the asset's value exceeded the loss for the period.

Accrued Expenses

Accrued expenses occur when a company records an expense for purchasing an asset but does not have to pay for it until the next period. Expenses are recorded at the time they are incurred, not when they are paid. For example, a company might record a substantial expense in Q4 but not have a cash outlay until the next year when the invoice is paid. As a result, the company might post a net loss in Q4 while maintaining a positive cash position.

When analyzing a company's financial statements, it is important to review all aspects of the company's financial position, including net income and cash flow. Only through a comprehensive analysis of all the financial statements can investors make an informed decision.