What Is Negative Cash Flow? 5 Tips to Manage It | QuickBooks (2024)

Cash flow

As a small business owner, you know firsthand how many obstacles you can face on the road to success. Ups and downs are inevitable and a critical part of any business that’s serious about growth. Even if you’re meticulous about financial forecasting, things can go wrong.

Negative cash flow is among the challenges your growing small business may face. Let’s say, one month, your business earns $5,000 in revenue but spends $10,000 on outgoing expenses. That’s an example of negative cash flow.

Let’s dive into the causes and effects of negative cash flow and five tips for managing it.

• What is negative cash flow?
• What causes negative cash flow?
• Effects of negative cash flow
• 5 tips to manage negative cash flow

Negative cash flow occurs when a business spends more than it makes within a given period. Although negative cash flow means there is animbalance in the revenue stream, it doesn’t necessarily equate loss. Often, it reveals temporarily mismatched expenditures and income.

Negative cash flow is a common financial occurrence for new businesses. Starting a small business is expensive, and it takes time and hard work to generate cash inflows that exceed investments. In essence, dealing with negative cash flow is almost unavoidable.

As mentioned before, negative cash flow means that your business isspending more moneythan 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. Uncontrolled or overlooked negative cash flow can render your business unprofitable.

However, the reality is that not every month turns a profit. Even the most well-recognized and successful corporations can struggle to stay positive every month. Some corporations may lose money and promote negative cash flow to produce higher profits in the future. No matter the scale of your business, experiencing negative cash flow is normal.

Your business’s primary source of income is profit. You generate profits when consumers purchase your goods or services. Of course, it cost your business money to manufacture or provide goods or services. The key to turning a profit is to eclipse outgoing costs with incoming revenue. When you can’t do that, you experience negative cash flow.

There may be many reasons your small business may be struggling tokeep your balance sheet positive. Those reasons can include:

• Ineffective sales and marketing strategies
• Low productivity among your staff
• Undercharging for your services or products
• Expensive operating costs
• Uncontrolled spending or cash outflow

If your business’s profits are too low—or you’re altogether unprofitable—you may find it difficult to source the money to cover all your essential outgoing costs. Typically, this shortcoming results in the need to borrow money to keep operations afloat.

As a small business owner, you should want togrow your enterprise. But if you don’t create strategic, detailed plans for growth, you could upset your efforts. Without a detailed business growth strategy, expanding too quickly could put your business in the red and leave you struggling with a cash flow deficit.

Additionally, several other growth issues can impact your small business’s financial health. These issues include:

• Mismanaged or uncoordinated financial tracking
• Ineffective and unorganized business operations
• Haphazard hiring
• Losing sight of big-picture goals

The price of your goods and services can influence your cash flow and net profit greatly. If you’re not charging enough or charging too much, any imbalance can lead to low profit margins.

As you determine your ideal market prices, you’ll face two truths: If your prices are too high, consumers may not buy your products. If your prices are too low, you may not generate the profit you need to keep your business alive and thriving.

As a business owner,cash flow managementshould be as critical and profound as revenue and profit supervision. Several negative consequences come along with negative cash flow. If you don’t take them seriously or mediate them, negative cash flow can threaten and jeopardize your business’s success and sustainability.

Among these many ramifications, stunted business growth, stymied dividends, and promotional deficiencies set your company back most.

It’s common for small businesses to cut their marketing budgets to reduce their overall operating expenses. But reducing marketing efforts can lead to more advertising sales and discounts that can tarnish customer perception of your brand and business viability.

If concessions on your products or services become constant, consumers may expect those lower prices. Or worse, they may lose interest when youget your business back to positive. This shift in expectations can have negative long-term effects on your revenue potential.

Before splurging on new equipment, software, or employees, weigh your business’s needs and review your financial statements. Upon review, make key changes to your spending and investing activities. One of the easiest ways to determine your wants from your needs is by creating a list that separates “must-haves” from “would-likes.”

When you’re dealing with negative cash flow, spending money on would-likes works against your business’s best interest. It’s more important to spend working capital on software, projects, or equipment that can keep your business open and whip your cash flow into shape.

Cash flow measures all expenses that go in and out of your business within a specified period.

Matched fluctuation in revenue and operating expenses mark healthy cash flow. The only way to achieve healthy cash flow is byimplementingand regularly operating with a cash flow forecast.

To create better projections, examine your current cash flow by creating a cash flow statement (or statement of cash flows).

A cash flow statement shows how shifts in balance sheet accounts and income impact cash and cash equivalents. The Small Business Administration (SBA) recommends performing a cash flow analysis monthly. This analysis can help ensure your small business has enough incoming cash to handle the next month’s obligations.

Cash flow forecasts are similar to ordinary business budget plans. Forecasts should narrowly estimate all business income and operating expenses on a monthly or quarterly basis.

When done effectively, your cash flow forecast should help give you a better picture of your working capital and expectations. Forecasting can also help you determine future financing activities and examine which expenses you can afford.

If you don’t actively monitor outgoing expenses, you may find it difficult to gain full business spending insights. When you review your outgoing costs proactively, you can maintain a stronger grasp on your finances and prevent future financial issues.

To begin this review process, record all overhead costs. Assess the costs that are absolutely necessary and determine which you could swap for a more affordable alternative. Do the same with operating expenses.

Run through this process every month or every quarter to ensure you’re on top of your business’s financial health.

Many businesses struggle with negative cash flow due to an overabundance of operating expenses. After reviewing outgoing expenses, assess where you may be able to eliminate unnecessary overhead and operating expenses.

Of course, there are many regular operating activities essential to your business’s survival. So it’s important to be intentional when cutting costs. Cutting costs can efficiently liberate your business from negative cash flow, but cutting costs haphazardly can lead to further injury.

Explore new ways to run your business with fewer expenses by creating cash flow forecasts that account for any financial shifts.

Unexpected operating expenses can upturn your finances instantly. That’s why it’s so important to reserve enough cash to cover any sudden costs. If you’re already working with a slim budget, consider cutting down on unnecessary outflows of cash that you could allocate to anemergency budget.

For example, if you have a monthly software subscription that you no longer use, cancel it. If you have an expensive utility bill, consider more economical energy alternatives. The idea is to eliminate anything that isn’t necessary for your business success so that you can reserve more money for emergencies.