Back in the early days of Y Combinator, we used to ask founders a simple question: “How much cash do you have, and how long will it last?” Not “What’s your revenue projection?” or “What’s your valuation?” Just cold, hard cash reality.
This often surprised founders who were used to thinking about their business in terms of growth metrics or market size. But there’s a reason we focused on cash—it’s the oxygen that keeps your business alive.
When I talk to small business owners, I notice they often ask the wrong questions about cash flow. They’ll ask, “Is my cash flow good?” as if it’s a simple yes or no answer. But cash flow is more nuanced than that. Let’s break it down.
The Three Types of Cash Flow: Understanding the Basics
Before we can decide what “good” cash flow looks like, we need to understand the three distinct types of cash flow that every business has:
1. Operating Cash Flow (OCF)
This is the money that comes in and goes out through your core business operations. It includes:
- Cash received from customers
- Cash paid to suppliers
- Salaries and wages
- Rent and utilities
- Taxes paid
Operating cash flow answers the question: “Does my fundamental business model work?”
2. Investing Cash Flow (ICF)
This represents money spent on or received from investments. It includes:
- Purchasing equipment or property
- Buying or selling investments
- Acquiring other businesses
- Selling major assets
Investing cash flow answers the question: “Am I building for the future?”
3. Financing Cash Flow (FCF)
This tracks money related to funding your business and returning money to investors. It includes:
- Loans taken or repaid
- Equity investments received
- Dividend payments
- Stock repurchases
Financing cash flow answers the question: “How am I funding my business?”
Most small business owners are familiar with the concept of positive and negative cash flow overall, but understanding these three categories gives you a much clearer picture of your business’s financial health.
What Makes a “Good” Cash Flow?
The short answer is: it depends. But let’s look at what generally constitutes “good” cash flow in each category:
Good Operating Cash Flow
Positive operating cash flow is almost always good. It means your core business operations are generating more cash than they consume. This is the most important type of cash flow because it shows your business model is fundamentally sound.
Signs of good operating cash flow include:
- Consistent positive numbers over time
- Growing operating cash flow that outpaces your growth in sales
- Stability even during seasonal fluctuations
- Ability to cover operational expenses without dipping into reserves
I know a retail business owner who maintained positive operating cash flow despite revenue dropping 30% during the pandemic. How? By quickly adjusting inventory purchases and negotiating better terms with suppliers. That’s the kind of adaptability that keeps businesses alive.
Good Investing Cash Flow
Here’s where it gets interesting. Negative investing cash flow can actually be good if it represents investments in long-term growth. For example:
- Buying new equipment that will increase productivity
- Expanding your facilities to meet growing demand
- Acquiring complementary businesses
- Investing in technology that reduces operating costs
A restaurant owner I know consistently had negative investing cash flow for three years as she opened new locations. Now, her business generates significantly more operating cash flow because of those investments.
Positive investing cash flow can be good if you’re selling unnecessary assets or harvesting returns from past investments. But beware: consistently positive investing cash flow could also mean you’re not reinvesting enough in your business’s future.
Good Financing Cash Flow
Financing cash flow is perhaps the most context-dependent:
Positive financing cash flow means you’re bringing in money from loans or investors. This is good if you’re using it to fund profitable growth that will generate positive operating cash flow in the future. It’s potentially bad if you’re borrowing to cover operating losses.
Negative financing cash flow means you’re paying back loans, paying dividends, or buying back stock. This is good if you have excess operating cash flow to cover these payments. It’s potentially bad if you’re depleting your cash reserves.
Why Is Positive Cash Flow Important?
Positive overall cash flow (when all three types are added together) is important because:
- It gives you options. Business is unpredictable. Having cash reserves lets you weather storms and seize opportunities.
- It reduces stress. Nothing keeps a business owner up at night like worrying about making payroll or paying vendors.
- It improves negotiating power. With cash in the bank, you can negotiate better terms with suppliers and customers.
- It funds growth internally. The best growth is self-funded growth. It’s less risky and you don’t dilute ownership.
- It builds credibility with lenders and investors. If you do need external funding, having positive cash flow makes you a much more attractive prospect.
I once advised a software company that was growing quickly but burning cash. They were so focused on revenue growth that they ignored cash flow. When the market turned, they couldn’t raise more money and had to lay off half their team. Had they focused on cash flow earlier, they might have grown more slowly but survived the downturn.
Can Negative Cash Flow Ever Be Good?
Yes, temporary negative cash flow isn’t always bad. Here’s when it might be acceptable or even good:
Scenario 1: Growth Investments
If you’re experiencing negative investing cash flow because you’re expanding, that’s often a good sign. Consider Amazon—they had negative cash flow for years as they built infrastructure that eventually led to dominance.
On a smaller scale, a local bakery might experience negative cash flow while opening a second location. This isn’t necessarily bad if there’s a solid plan for that location to generate positive operating cash flow in the future.
Scenario 2: Startup Phase
Early-stage businesses often have negative operating cash flow as they develop products, build customer bases, and establish operations. This is normal and expected.
However, this should be deliberate and time-limited. You should have a clear path to positive operating cash flow and enough runway to get there.
Scenario 3: Debt Repayment
Negative financing cash flow due to debt repayment is often a good sign. It means you’re strengthening your balance sheet and reducing future interest payments.
A friend who runs a manufacturing business intentionally maintained tight cash reserves for two years as he aggressively paid down high-interest debt. Once the debt was gone, his operating cash flow immediately improved because he eliminated interest payments.
Scenario 4: Seasonal Businesses
Many businesses experience negative cash flow during certain seasons. A retail store might have negative cash flow while building inventory for the holiday season, then strongly positive cash flow in December.
This pattern is normal and healthy as long as the positive periods more than offset the negative ones over a full cycle.
The Cash Flow Patterns of Healthy Businesses
In my experience, healthy businesses tend to show these patterns:
- Consistently positive operating cash flow
- Periodically negative investing cash flow (indicating growth investments)
- Gradually shifting financing cash flow (from positive while growing to negative when established)
The exact mix depends on your business stage:
- Startups: Often have negative operating cash flow, negative investing cash flow, and positive financing cash flow (from investors).
- Growth-stage businesses: Ideally have positive operating cash flow, negative investing cash flow (for expansion), and either positive or negative financing cash flow depending on how much they’re growing.
- Mature businesses: Usually have strong positive operating cash flow, modestly negative investing cash flow (for maintenance), and negative financing cash flow (returning money to owners or investors).
Practical Tips for Improving Your Cash Flow
If your cash flow isn’t where you want it to be, here are some practical steps:
- Focus on operating cash flow first. Improve collections, adjust pricing, negotiate better terms with suppliers, and manage inventory more efficiently.
- Time your investments carefully. Make sure your operating cash flow can support your investing cash flow needs, or that you have appropriate financing in place.
- Develop a cash flow projection. Know what’s coming in and going out over the next 6-12 months.
- Build a cash reserve. Aim for 3-6 months of operating expenses.
- Review your cash flow statement monthly. Look for trends and address issues before they become crises.
- Consider opportunity costs. Sometimes it’s worth having negative cash flow in the short term for long-term gain.
- Separate your three types of cash flow. Don’t use operating cash flow metrics to judge investing activities, or vice versa.
Conclusion: The Cash Flow That’s Right for Your Business
So, which cash flow is good? The answer is contextual:
- Good operating cash flow is almost always positive and growing.
- Good investing cash flow is negative when you’re growing, balanced when you’re stable.
- Good financing cash flow depends entirely on your business stage and strategy.
The most important thing is intentionality. Negative cash flow isn’t inherently bad if it’s part of a deliberate strategy with a clear path to future positive cash flow.
Remember, cash flow isn’t just about survival—it’s about creating options. And in business, having options is perhaps the most valuable position of all.
What’s your cash flow telling you about your business?