Cash deficit

Definition

A cash deficit occurs when a company's cash outflows exceed its cash inflows within a specific period. It indicates that the business is spending more money than it is earning, leading to negative cash flow.

5 Must Know Facts For Your Next Test

1. A cash deficit can signal financial distress and may require the company to seek external financing or cut costs.
2. Cash deficits are often identified through financial forecasting and budgeting processes.
3. Consistent cash deficits can deplete a company's reserves and impact its ability to operate effectively.
4. Managing cash deficits involves strategies such as improving receivables, delaying payables, or securing short-term loans.
5. Cash flow statements are crucial for monitoring and identifying potential periods of cash deficit.

Review Questions

• What does a cash deficit indicate about a company's financial health?
• How can companies manage or mitigate a cash deficit?
• Why is financial forecasting important in identifying cash deficits?

Related terms

Cash Flow Statement: A financial statement that provides aggregate data regarding all cash inflows and outflows a company receives.

Financial Forecasting: The process of estimating or predicting how a business will perform in the future based on historical data, trends, and management insight.

Working Capital: The difference between current assets and current liabilities, indicating the liquidity available to manage day-to-day operations.