Certified Financial Management Specialist Practice Exam

Negative cash flow typically indicates what about a company?

1. Strong financial performance

2. A healthy operating cycle

3. Potential liquidity problems

4. High levels of profitability

The correct answer is: Potential liquidity problems

Negative cash flow indicates potential liquidity problems for a company because it signifies that the outflows of cash exceed the inflows over a certain period. This situation can lead to difficulties in meeting short-term obligations, such as paying suppliers, employees, and other expenses necessary for daily operations. While a company may still be profitable on paper (due to accounting practices that recognize revenue regardless of cash received), negative cash flow can highlight underlying issues in cash management or operational efficiency. In contrast, strong financial performance, a healthy operating cycle, or high levels of profitability usually correlate with positive cash flow. Businesses need to carefully monitor cash flow statements to ensure they can sustain operations and invest in growth while also meeting financial commitments. Negative cash flow, therefore, serves as a red flag that requires management's attention to investigate the causes and implement corrective measures.