Negative Cash Flow: What It Is And How It Works | American Express (2024)

Negative Cash Flow: What It Is And How It Works | American Express (1)

If you want to build a successful company, you’ll need to make more money than you spend. At least, that’s the long-term goal. But many business owners find they have to operate in the red (i.e., spend more than they make) at times.

Negative cash flow isn’t necessarily a bad thing if you’re following a plan. However, you want to avoid running out of cash entirely. To avoid this situation or simply to improve your business cash flow, you may want to consider exploring available business funding sources.

What is negative cash flow?

Negative cash flow is when more money is flowing out of a business than into the business during a specific period. Positive cash flow is simply the opposite — more money is flowing in than flowing out.

While the concept is straightforward, tracking the movement of money through a business can get complicated. If you have a small business accounting system in place, you can quickly generate a cash flow statement. Along with your balance sheet and profit and loss statement, these make up the main three financial statements for a business.

What is an example of negative cash flow?

Periods of negative cash flow are common and sometimes expected. As the saying goes, you have to spend money to make money.

For instance, a brand-new business might not make enough money to support itself at the start. Therefore, many entrepreneurs need business funding to start and grow their companies. Famously, some tech startups even can go years before making a profit.

It’s not as realistic for small businesses to last years without turning a profit. But hopefully the initial investments will pay off, and the company will become profitable.

Seasonal businesses also commonly have predictable periods of negative cash flow. A well-known beach town restaurant might make most of its profits during the summer months. Once the busy season wraps up, the restaurant might have much lower labor and supply costs. However, it still may need to take out a business loan or dip into savings to cover the rest of its operating costs during the off-season.

How does negative cash flow affect a business?

Negative cash flow can make running a business more difficult in the short term. The pressure to cut corners can build if you’re watching your business bank account slowly dwindle — this can have long-term negative consequences on your finances.

For example, you might not be able to invest in quality equipment, resulting in spending more money to replace or repair the equipment later. Or you might decide to wait to hire more staff or launch a marketing campaign, which might perpetuate the problem if you then run into staffing shortages or struggle to increase sales.

If you continue to lose money, you may have to lay off employees, forgo your own paychecks, fall behind on payments to vendors and creditors — or even shut down.

Is it OK to have negative cash flow?

Operating with negative cash flow isn’t necessarily a bad thing. Even giant, international and world-famous corporations operate at a loss for some months or years. Sometimes, they even lose money and experience negative cash flow on purpose to invest in something that will produce massive profits in the future.

Here are a few situations that can cause a company to experience negative cash flow, even though the company isn’t necessarily in a bad place:

  • Purchasing large business
  • Spending money to open a new
  • Creating a new product line or service
  • Launching a marketing
  • Ramping up for a busy

In these cases, the companies are following a plan that requires an initial investment. If they’re measuring their cash flow over a given month or quarter, they might record negative cash flow for that period. But it’s a strategic decision to invest in the business.

In contrast, negative cash flow can become an issue when you don’t have a plan or strategy. If you’re unexpectedly in the red due to declining sales, unpaid invoices or increased expenses, you’ll need to figure out how to improve cash flow.

How long can you operate with negative cash flow?

You can operate with negative cash flow so long as you have cash reserves or access to small business funding to continue operations.

Startups, which commonly operate at a loss initially, often track their cashflow runway, meaning how long they can last with negative cash flow until they run out of money. They also track their burn rate, which is how quickly they’re losing money.

To find these for your own business, you can:

  1. Figure out how much cash you have on
  2. Calculate how much money you’re losing each month (your burn rate).
  3. Divide your cash by your burn

For example, if you’re burning $5,000 a month and have $60,000 in reserves, your runway is about 12 months.

However, your burn rate and runway aren’t set in stone. If you’re worried about running out of money, you may be able to extend your runway or completely switch things around and have positive cash flow by increasing your income or lowering your expenses.

How to improve cash flow

Cash flow depends entirely on three things: money coming in, money going out, and the timing of these transactions. You’ll need to focus on at least one of those areas if you want to improve your cash flow.

Here are a few steps you can consider to improve your cash flow:

  • Raise prices: Increasing your prices may seem counter-intuitive when you’re worried about losing customers, but sometimes it’s necessary to stay in
  • Look for ways to increase sales: Consider how you might spur new Perhaps you can try a new product or service, promotions, discounts, or marketing campaign.
  • Cut operating expenses: See if you can decrease your monthly costs by making your business more Perhaps you can shop for new business insurance plans, negotiate discounts with suppliers, and cut energy costs.
  • Ask vendors about terms: While it won’t save money overall, a terms account lets you pay for invoices over time. Having more time can help you align your income and expenses to smooth your cash flow.
  • Don’t delay sending invoices: Review your invoicing methods to minimize collection When customers pay on terms, you can offer a small discount to incentivize them to send you the payment sooner.

You can also consider funding for your business, including an unsecured loan or line of credit if you need to improve your cash position. While you’ll need to repay the loan over time, financing can give you the funds you need to weather a slowdown or implement a strategy that will increase sales and improve profits.

On the opposite side of this cash flow coin, are there major expenses coming your way that aren’t part of your monthly calculations? Tax bills, major repairs and annual association dues or insurance payments are examples of this. Each of these can reduce your reserves and bring close of business closer." } },{ "@type": "Question", "name": "What expenses can you cut?", "acceptedAnswer": { "@type": "Answer", "text": "Look hard for opportunities to reduce your bottom line. Just like a family might cancel their cable bill to help cover Junior’s college costs, your company can slash nonessential services (and even owner perks) to reduce how much red you have at the end of each month. Finding a way to save even $500 per month can extend your expected life span.

While you’re at it, keep looking for ways to increase income via new clients, up-selling existing customers and entering new markets. If you’re $5,000 in the hole each month with $60,000 of reserves, an extra $500 in billings gives you another month of operations." } },{ "@type": "Question", "name": "How can you extend?", "acceptedAnswer": { "@type": "Answer", "text": " Some of these opportunities aren’t as simple as asking a vendor for an extension. Taking on more business credit, getting a cash infusion from a new investor or putting more of your personal funds into the business are all other ways to extend.

An extension either cuts immediate expenses (thus reducing how much you lose monthly), or adds to your reserves, or both. It can feel like a lifesaver at the time, but is really like drinking coffee. Coffee doesn’t make you less tired. It puts off the moment when the tiredness kicks in. Be very careful about the false sense of security extensions can create, and make smart decisions." } },{ "@type": "Question", "name": "How reliable is your finish line estimate?", "acceptedAnswer": { "@type": "Answer", "text": "If, for example, you have a signed contract starting in six months with a new client who can single-handedly put your company in the black…then it’s worth making many sacrifices and taking on some debt to make that number. Similarly, if your income is growing by 5 percent a month and you need only a 50 percent increase to become profitable…do whatever is necessary to still be open 10 months from now.

But if your “finish line estimate” is more of a guess or a hope, you have two choices:

Accept that your business model is not functional. Close your business soon, or radically alter the model so you can be profitable.Find out how to have a more concrete and reliable finish line." } }]}

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Negative Cash Flow: What It Is And How It Works | American Express (2024)

FAQs

Negative Cash Flow: What It Is And How It Works | American Express? ›

Cash flow definition

What happens when cash flow is negative? ›

Negative cash flow is when your business has more outgoing than incoming money. You cannot cover your expenses from sales alone. Instead, you need money from investments and financing to make up the difference. For example, if you had $5,000 in revenue and $10,000 in expenses in April, you had negative cash flow.

Can you be profitable with negative cash flow? ›

Yes, a profitable company can have negative cash flow. Negative cash flow is not necessarily a bad thing, as long as it's not chronic or long-term. A single quarter of negative cash flow may mean an unusual expense or a delay in receipts for that period. Or, it could mean an investment in the company's future growth.

How long can a company last with negative cash flow? ›

You can operate with negative cash flow so long as you have cash reserves or access to small business funding to continue operations. Startups, which commonly operate at a loss initially, often track their cashflow runway, meaning how long they can last with negative cash flow until they run out of money.

How do you deal with negative free cash flow? ›

How to fix negative cash flow
  1. Create a cash flow statement. You won't be able to manage your finances without accurate, up-to-date financial statements. ...
  2. Review and reduce outgoing expenses. ...
  3. Find access to back-up cash. ...
  4. Automate y createsour accounting processes. ...
  5. Streamline your payments process.

Why is negative cash flow good? ›

Young companies are likely to report negative free cash flow due to constant reinvestments to finance growth. Such negative free cash flow is good if these reinvestments accelerate revenue and increase margins in the near future.

What is a negative cash flow in simple terms? ›

As mentioned before, negative cash flow means that your business is spending more money than it receives. Though negative cash flow is not inherently bad, this financial asymmetry is not sustainable or viable for your business in most cases. Ultimately, your business needs enough money to cover operating expenses.

Is cash flow monthly or yearly? ›

A cash flow statement shows the exact amount of a company's cash inflows and outflows, either monthly, quarterly, or annually.

What is cash flow in simple terms? ›

Cash flow is the net cash and cash equivalents transferred in and out of a company. Cash received represents inflows, while money spent represents outflows.

Why is my cash flow not balancing? ›

When a cash flow statement model doesn't balance, it can cause immense frustration and wasted time. The root cause of this problem most commonly resides in models being built with inconsistent and contradictory data sources.

Should cash flow be positive or negative? ›

If you want your business to survive and thrive, you need your company's cash inflows to exceed its cash outflows. Accountants call this positive cash flow, and it's a crucial hallmark of any profitable business.

What does a negative cash balance mean? ›

Definition of Negative Cash Balance

A negative cash balance results when the cash account in a company's general ledger has a credit balance. The credit or negative balance in the checking account is usually caused by a company writing checks for more than it has in its checking account.

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