Can a company be profitable while experiencing negative cash flows?

A company can indeed be profitable while experiencing negative cash flows. Profitability is determined by a company's revenues exceeding its expenses, resulting in net income. This is an accounting measure that focuses on earnings over a period, typically reported on the income statement.

However, cash flow measures the actual inflows and outflows of cash during a specific time period, reported on the cash flow statement. A company may have high sales and report significant profits on paper, yet may still experience negative cash flows due to various factors, such as investment in inventory, accounts receivable (sales made on credit), or capital expenditures. For example, a company could recognize revenue from sales but not receive cash immediately, especially if it offers credit terms to its customers, which delays cash inflows.

This phenomenon is especially common in industries that require substantial upfront investments or those that rely heavily on customer credit. Therefore, a company can show profitability while having negative cash flow, highlighting the importance of managing both metrics effectively for a holistic understanding of financial health.