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Does "Its cash flow is deeply negative" mean "Netflix makes a big loss"?

Netflix is profitable, but only on an accounting basis. Its cash flow is deeply negative as it pours cash into content. Apple will need to be just as aggressive with content spending to stand a chance. Spotify isn't profitable, and Apple Music likely isn't, either. Apple's news and game subscription services may have the best chance of producing profits, but they're unlikely to become big enough to move the needle.

Source: https://www.ibtimes.com/problem-apples-services-strategy-2780023

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    Funny, from the title I thought this one would be about netflix... – quid Mar 28 at 7:01
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    @haile One of the reasons you shouldn't select an answer too quickly is that it discourages other answers. Another reason is that you may select an incorrect or misleading answer (like you did here). I suggest deselecting that answer and waiting 24 to 48 hours before selecting another. – user73687 Mar 28 at 15:12
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    Could you unaccept Icaval's answer and accept Harper's instead? – Solomon Ucko Mar 29 at 0:53
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    @SolomonUcko Or Ganesh Sittampalam's. – glglgl Mar 29 at 8:40
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    In other words, Netflix is actively investing its money, putting itself in a position where it has very good reasons to continue growing and staying relevant into the future, instead of resting on its laurels? I wish more companies would do that! – Kevin Mar 29 at 19:25
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It means they're making a big loss in cash terms, yes. The claim that they are profitable is based on a theory that they are accumulating valuable assets in exchange. In Netflix's case, it's that they are spending lots of money on their content, which they expect to produce income in future years too.

So essentially lots of cash going out the door now, but they hope to make it back in future based on people continuing to pay for the things they are producing now.

There's some discussion and skeptical analysis here and here.

Here are links to Netflix's actual income statement and cash flow statement

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    Basically, you have to spend money to make money. – Mohair Mar 28 at 16:13
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    If you keep buying assets that are not returning cash appropriate to the expense in purchasing them - you'll certainly have a negative cash flow. (but you can have a positive balance over the year due to assets multiplying in value) This is what netflix is doing - they try to inflate the value of their platform by filling it with extremely expensive content that they never expect any return on investment on. They assume that the value of their future user database will be the return on investment - but that is not a real asset, but an intangible one. And it is sort of a gamble. Like fb. – Stian Yttervik Mar 28 at 16:54
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    @StianYttervik I don't think it's that complicated. If, as given as a possibility in one of the articles I linked to, they are amortising at 40-30-20-10, then if they spend $100mn today, they'll charge $40mn against profits this year, and leave a $60mn asset on their books. Then next year they'll charge another $30mn so the asset will be depreciated to $30mn, then $10mn and finally 0. So they won't be claiming it's multiplying in value, just that they don't have to charge all the cost up front. And the asset is the content, not the user database. – Ganesh Sittampalam Mar 28 at 17:21
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    @StianYttervik, what Netflix is doing is comparable to General Motors building a factory: they're spending money now to create something that they hope will produce money in the future. – Mark Mar 28 at 20:30
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    @StianYttervik, "at a loss" is a tricky thing to calculate when your product has a high up-front cost and negligible marginal cost. In order to say that any given sale is at a "gain" or a "loss", you need to estimate the total number of items you're going to sell. – Mark Mar 28 at 23:01
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You're talking about the difference between Profit and Loss (as in, the accounting report with the same name) versus Cash Flow (again, accounting report of the same name).

The difference exists because not all assets are cash. Yet a non-cash asset is carried on the accounting books at its cash value - the value of a building, the value of vehicles, equipment, inventory, even intangibles like the value of a copyright, patent, franchise, etc. Buildings are great, but you can't pay salaries with them, so you need to also mind the cash.

Here's a great example. Museum X has a $100,000 exhibit that doesn't fit their collection, but it belongs in Museum Y's collection, and will help Museum Y make a lot more money in the long run. Both museums make $4000 net profit each year.

I donated $100,000 to Museum X on condition that they give the exhibit to Museum Y. Unfortunately, it cost Museum Y $10,000 to prepare, move, and set up the exhibit. What does this do to both museum's cash flows vs P/L?

For museum X, it's a wash on their Profit/Loss Statement. They lost a $100,000 asset (the exhibit) but gained another (the cash), so these two things cancel each other out and it posts as a normal $4000 profit year. Different deal on their Cash Flow Statement. There, their cash flow leaps to $104,000. Wowza!

For Museum Y, their Profit/Loss statement is pure good news, because the new asset adds $100,000 of paper profit. They post a $94,000 profit - their normal $4000 profits, plus the $100,000 gift, minus the $10,000 cost to move it. Fantastic year on paper. It's a different story on their Cash Flow Statement - they are $6000 negative becuase of the cash outlay to move the exhibit.

Museum Y's patronage increases because of their new exhibit, which greatly improves their real cash income (cash flow and P/L) in future years.

What happens if you rely on the Profit/Loss Statement and ignore Cash Flow? Well, both museums would make bad decisions - Museum Y would get spendy when it has no cash, and Museum X would fail to realize they have a nest egg now.


With Netflix, they are pouring their cash into "exhibits" - these cost them a bunch of money up front, but will produce income for them for years later. These assets could even be sold. In effect, they are converting cash assets into fixed non-cash assets: a wash on the Profit/Loss statement, but a huge hit on the Cash Flow statement.

But that is normal for businesses. Ships aren't built to stay in harbor, and businesses aren't built to keep cash sitting around.

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    +1 for that last sentence, and I wish more people understood that. – Shadur Mar 29 at 8:22
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    "What happens if you rely on the Profit/Loss Statement and ignore Cash Flow? Well, both museums would make bad decisions.." - agreed. And if you rely solely on the yearly Cash Flow statement and ignore Profit/Loss then both museums will also make (different) bad decisions: they wouldn't invest in assets that would produce future cash flow, and they'd treat selling off existing assets for less than their worth as "making money". – Andrzej Doyle Mar 29 at 9:43
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    "Buildings are great, but you can't pay salaries with them, so you need to also mind the cash." This is really really important, thank you for that. Just the idea that a profitable company might go broke for lack of ability to pay their employees causing a hemorrhage of talent causing a lapse in commitments causing their clients to flee... oof, brutal. – CR Drost Mar 29 at 22:25
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Apart from capital investments (purchasing valuable assets with borrowed money) negative cash flow can be a result of late payments. If your customer pays you at the end of the month for a service which you have to deliver (and pay the associated costs) now, then a rapidly growing customer base can become problematic because of negative cash flow despite the business being profitable.

For example, suppose a company is paying an average of $8 in bandwidth and infrastructure costs for every customer with a $10 subscription to be paid at the end of the month. Considering those two numbers, the company is clearly profitable. But if 1000 new customers show up every month, the company would have to deal with a negative cash flow of $8000, and if they don't generate enough profits and cannot borrow that money, they won't be able to provide their services to these new customers. They'd need to have 4000 existing customers (assuming no other expenses) to be able to grow at a rate of 1000 new customers per month. This is probably not a problem for Netflix which already has a sizeable user base, but it will be for Apple if they decide to start a Netflix-like service (like the article suggests), since the user base of such a service is expected to grow very fast initially, thanks to a large number of iPhone owners.

In both cases, biting off more than the company can chew (investing too much or growing too fast) will result in financial problems and even bankruptcy, even if the business model is profitable in theory.

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    If you have a solid plan for how you will get your future profit, you will be able to borrow the money. Of course, it is up to the bank to decide how solid that plan is. – Stig Hemmer Mar 29 at 10:02
  • @stannius A company can have billions of cash available and a negative cash flow, that just means it's spending that money. – Dmitry Grigoryev Apr 2 at 7:54
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It means that they have enough money (or credit) to make these purchases now, but aren't currently making that money back. They've spent more than they currently expect to make - but are still 'profitable' because they believe those purchases will make them more money.

So for example, let's say Netflix is currently spending $5 Million on new assets this month, and they're expected to make $3 Million this month on their services. They'd have a negative cash flow of -$2 Million.

The reason they are able to do this is because of their cash reserves (For example, if they have $10 Million in cash reserves, then they can afford their $5 Million asset purchases), and why they are still considered 'profitable' is because they're expected to make up these losses with growth (These new assets are expected to increase their incoming revenue).

There is a risk with this kind of investment though - their new assets might not interest any new subscribers, in which case they will see no growth at the cost of their cash reserves. And even if they do, they will need to see a significant and sustained increase in subscriptions for that investment to be worth their initial purchase.

A practical example would be a teenager who saves up enough in allowances to buy a $100 lawnmower in the Spring. Their "cash flow is negative" because they just spent significantly more than they make, but their plan is to use that lawnmower to make more money for themselves. The risk being they need to find enough lawns to mow in the Summer to make back their $100 purchase, and then some, before they start seeing a profit.

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    On the accounting books, it gets even weirder, because the teenager must depreciate the lawnmower over several years. – Harper Mar 29 at 0:48
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    It's more than just new subscribers of course - a company like Netflix must keep investing to retain their current customers. – curiousdannii Mar 30 at 10:23
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Suppose, for example, that it costs you $2000 to bring a new customer on board, and that you reasonably expect that customer to pay you $100/month for at least the next 5 years. Suppose further that your sales force is doing a bang-up job, and signing up 100 customers/month. Also suppose that you are good at controlling your fixed costs.

You are cash-flow negative, big time. I would also invest in your company in a heartbeat.

There are businesses that can bootstrap, that is, finance their growth out of cash flow. They are not necessarily better than companies that require financing. I worked for one that was able to bootstrap, right up to the point where our market exploded. Then we had to borrow, well, let's just say many, many zeros. Large financial institutions lined up to lend us what we needed.

  • That's exactly it. – Peter A. Schneider Mar 29 at 20:17
  • Now that's an interesting example... they report profitability on month, what, 21? (2100 customers, $10k/mo) At that time they should be roughly $2.1M in the hole? Presumably that also means they report breaking even on month 42 or so, the other side of the parabola, but they've maybe not paid back their opportunity costs until something like the end of that year? Anything else I am missing about it? – CR Drost Mar 29 at 22:17
  • Profitability depends on how they recognize revenue & expenses, so you'd need a whole bunch of details ignored in my over-simplified example to calculate it. Depending on their sales growth (by next year will they be selling 200/mo?) cash flow may be negative for a long time. Which is why you see startups raising B & C rounds. From investors who believe they know how to calculate it. – Ron Mar 29 at 22:58
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A company with a negative cash flow is one which has annual expenditure that exceeds its income -- in the current accounting year.

In the current accounting period, therefore, it is making a net loss on its trading account, commonly known as its profit-and-loss account.

No one has yet mentioned its balance sheet. A company has net assets, in addition to its net profit/loss. It can finance a net loss in the current period from its net assets, accumulated in previous trading periods.

A deeply negative cash flow merely means a large net loss in the current period: but more commonly refers to a previous period, in other words refers to the last full trading period for which figures are available/published.

It does not imply anything, taken on its own. In order to understand the company's financial situation, one needs to know also its net assets (from its balance sheet): this tells you whether the company can finance a trading loss from its net assets (which is really saying: from its reserves).

Capital assets (e.g. the value of land or buildings it owns), and cash-at-bank, are reported on its balance sheet as part of its net assets. You need to be an expert in order to analyse a balance sheet, because (for example) capital assets can be difficult to value accurately: they might be recorded at their historic cost, instead of their current market value; and it may be difficult to correctly assess what their current market value truly is.

A negative cash flow can also occur from buying goods or property, which are included by normal accounting practice as net assets, hence are recorded in the balance sheet, not the profit and loss account. A negative cash flow resulting from purchasing valuable assets does not imply anything negative about the company's net value or prospects.

So for all these reasons, taken on its own even a deeply negative cash flow on current account does not really mean anything.

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