Cash flows are the lifeblood of a business that keeps the operations going. Just as irregular blood flow numbs the body and a prolonged lack of blood can prove fatal, negative cash flow for the short term is natural, but a prolonged situation can snowball into a business problem that could ultimately lead to the dissolution of the company.

What is Negative Cash Flow, and Is It Bad?

Every business goes through ups and downs, which could lead to both positive and negative cash flows from time to time. A negative cash flow occurs when outgoing (expenses, investments) is bigger than incoming (revenue). The cash flow of a new business will most likely be negative as it spends on product and advertising to attract customers and get the revenue wheel churning.

Even a sizeable, profitable company could see some periods of negative cash flow due to an unexpected expense. But a few months of negative is offset by other months of positive.

However, negative cash flow becomes a problem when it gets deeper and is prolonged. Such cash flows stagnate business growth as it shifts focus on meeting payments rather than on growing revenue.

If your company has been reporting losses and negative cash flows for a long, it is a business problem and needs your attention. Here are a few tips to help you manage and keep your cash flow healthy.

Tips To Manage Negative Cash Flow

There are three types of cash flows:

• Operating – cash you pay to creditors and receive from customers.
• Financing – cash you raise from debt or equity and pay as loan repayment and dividends.
• Investing – cash you spend to purchase assets or receive by selling assets.

Identify the Root Cause of Negative Cash Flow

The first step in managing any problem is to find and fix the problem’s source. Your cash flow statement can help you find the cause.

Negative Cash Flow from Operations

If your operating cash flow is negative, your receivables are less than your payables. This can be due to multiple reasons:

• Payments Due: Customer payments are past due, blocking your cash inflow. In such a scenario, you can follow up with customers, offer discounts or part payment options, or offer other modes of payment. You can solve this through clear communication.
• Low Pricing or Higher Expenses: A business is spending more than it is earning either because it has priced its offerings too low or is spending too much. You can go back to your books of accounts and identify areas where a cost cut is possible, like software subscriptions you don’t use or look for cheaper alternatives. You can also look for ways to boost revenue and increase pricing by dividing it into standard and premium offerings and adding some value that doesn’t cost much.
• Growing Too Fast: Many big and small businesses fall prey to accelerated growth. They hire too many full-time employees, buy expensive equipment, or store higher inventory in anticipation of higher order volumes. In such a scenario, you can talk to the suppliers and return the inventory or sell it at a discount. You could consider outsourcing work or hiring freelancers for seasonal orders, saving on salary.

Negative Cash Flow from Investing

Your investing cash flow could be harmful in the initial years as you invest in fixed assets like cars or equipment and capital expenditure. They have a higher purchase cost, generating cash flows throughout their work life.

Investing cash flow = operating cash flow – capital spending – net working capital

A very high negative investing cash flow for a longer term could mean you are overinvesting and buying too many assets that do not generate relevant cash flow. While your enthusiasm for a new project may be high, building a budget and sticking to it is necessary instead of getting overboard.

Cash Flow from Financing

When investing and operating cash flow turns negative, you source cash from financing options like small business loans and business credit cards. Avoid raising too much debt in difficult times, as financing costs may be high in an environment with a high-interest rate. You can maintain an emergency reserve for unexpected expenses like income tax or sudden shock in utility bills.

You can manage all these cash flow shocks by analyzing outgoing and incoming cash flows monthly and building a cash flow forecast. You can take the last few months or years of cash flow and plan your future spending and receivables.

Despite meticulous financial planning, a business can face negative cash flows. As long as it is temporary, it is okay.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Bookkeeping

A professional bookkeeper can identify the gaps in cash flow early and highlight the root cause to help you plan your next move accordingly. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with your bookkeeping services, contact us online or by telephone at 905-517-2297.