When you run a small business, it’s important to keep track of where cash moves in and out of your company in a given year. “Cash flow to stockholders” measures the amount of cash you distribute to your company’s owners in a particular period in excess of the amount you receive from them. If you take in more cash from shareholders than you distribute, cash flow to stockholders is negative. Whether this is good or bad depends on the circumstances.

## Calculating Cash Flow to Stockholders

Cash flow to stockholders equals the amount of dividends paid to stockholders minus the cash raised from issuing new stock plus the amount of stock repurchased from existing stockholders. You can find these transactions in the financing activities section of your cash flow statement. For example, assume your small business pays a \$10,000 dividend and issues new stock for \$200,000 during the year. Your cash flow to stockholders is -\$190,000, or \$10,000 minus \$200,000.

## Breaking It Down

Cash flow to stockholders can be negative only in a year in which you issue new stock and when the amount sold exceeds dividends and share repurchases. When you sell stock, cash moves from stockholders to your business. This is the only item that negatively impacts the cash flow to stockholders formula. The other two transactions -- dividends and stock repurchases -- represent cash flowing from your business to stockholders, which positively affects the formula.

## When a Negative Isn’t Negative

In certain instances, negative cash flow to stockholders is perfectly normal for a small business. A company often has negative cash flow to stockholders in its first year of business because of startup money contributed by owners. The cash flow measure also might be negative in subsequent years if a rapidly growing business raises additional capital from investors to fund expansion. If a business allocates the new capital wisely, it might generate higher future profits.

## Cause for Concern

Sometimes negative cash flow to stockholders can be a bad sign. This might occur if a stagnant or declining business has negative cash flow to stockholders year after year. This string of negative figures and lackluster performance suggest the business relies too much on outside funding and might have trouble sustaining itself. For example, if your business has negative cash flow to stockholders along with falling sales for four consecutive years, your business strategy could be fundamentally flawed.