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

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Cash flow

September 9, 2020

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

What is 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.

What Is Negative Cash Flow? 5 Tips to Manage It | QuickBooks (19)

Is negative cash flow bad?

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.

What causes negative cash flow?

Several mistakes, miscalculations, and financial roadblocks can cause you to spend more than you earn. Let’s take a closer look at eight of the most common causes of negative cash flow.

1. Low profits

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.

2. Overinvesting

One of the most common downfalls for businesses at any size or age is overinvesting. You overinvest when you spend an excessive amount of cash on non-business-critical services, projects, or products. Ultimately, these payments only drain funds rather than boost profitability. Overinvestmentsact against your company’s best interestsand shareholders and can quickly result in negative cash flow.

3. Expedited growth

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

4. Unexpected financial expenses

Any money you have to spend on unexpected expenses can throw off yourprojected cash flow. These unexpected costs are outflows of cash you didn’t forecast in your monthly or quarterly financial plan. Some of the most common unexpected expenses include insurance premiums, equipment maintenance, taxes, and shrinkage. If you don’t allocate funds to sudden charges, you may find yourself dealing with negative cash flow.

5. Expensive overhead costs

Overhead costs account for all ongoing expenses that are not directly related to production or sales. Essentially, overhead costs are those that your business needs to stay in business—regardless of your business’s profitability or success. Each of these overhead costs is critical for keeping your business open. But if the sum of overhead expenses is too great, you may cripple your cash flow.

What Is Negative Cash Flow? 5 Tips to Manage It | QuickBooks (20)

6. Past-due customer payments

Late payments can lead to a damaging cycle of negative operating cash flow, according to a2019 QuickBooks report. In the United States, small business owners reported an 81% increase in outstanding receivables from 2018 to 2019. Small businesses held an average of $78,355 in outstanding receivables. 71% of respondents claimed that late payments affected their ability to cover supplier payments. Without setting and enforcing detailed payment terms, small business owners may find themselves scrambling to collect unpaid invoices. Without those payments, they may not have enough cash to keep their businesses afloat.

7. Too high or too low product pricing

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.

8. Poor financial planning

If you don’t regularly assess your cash flow statements,strategize a cash flow forecast, or set a realistic budget, your business may experience cash shortages. Financial planning is a critical facet of any business that has its sights on growth. Without the proper game plan, your finances can fall off-kilter and result in negative cash flow.

Effects of negative cash flow

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.

Stunted growth

If your small business spends more timemanaging negative cash flow, it can’t fully shift its focus back to growth and bigger challenges. Even if you can cover your overhead costs, insufficient cash inflows pose an inevitable roadblock in your company’s progress. With a smaller budget, achieving growth goals can become insurmountable. Stunted business growth can also lead to diminished employee morale and a tarnished company reputation.

Stymied dividends

Without positive cash flow, your business may struggle to pay dividends to owners. Anyone who has invested in your company may not collect areturn on their investment, damaging your relationship. Limited dividends in exchange for growth and further investment is tolerable. Butinvestorsmay take issue with a company that struggles due to poor cash flow management.

Promotional deficiencies

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.

5 tips to manage negative cash flow

Finally, the golden question: How can you manage negative cash flow? Use these five tips to get your cash flow back into the green.

1. Be mindful of your spending and investing

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.

2. Create a cash flow statement and forecast regularly

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.

3. Review outgoing expenses regularly

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.

4. Reduce expenses

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.

5. Create an emergency budget to accommodate unexpected expenses

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.

Wrapping up

Negative cash flow is a common facet of business growth and development, no matter your company’s size or scale. So long as you’re quick to recognize and remedy your cash flow imbalance, negative cash flow is nothing to worry about. Follow this guide to stay on the pathway toward success.

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

FAQs

How to manage negative cash flow? ›

Negative cash flow is common in growing businesses, and if you're able to spot the issues as they occur and solve them, then you're good to go! To improve cash flow for your business, prioritize resources that will bring you returns, plan ahead, focus on your cash flow statements, and stay on top of your forecasting.

What is negative cash flow examples? ›

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.

How do you manage poor cash flow? ›

9 cash flow strategies
  1. Don't wait to send invoices. ...
  2. Adjust your inventory as needed. ...
  3. Lease your equipment instead of buying it. ...
  4. Borrow money before you need it. ...
  5. Reevaluate your business operations. ...
  6. Restructure your payments and collections. ...
  7. Monitor where your money is going. ...
  8. Take advantage of technology.
Apr 11, 2024

How do you solve a negative cash balance? ›

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.

What should a business do if it has a negative cash flow? ›

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.

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.

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.

Which activity is usually a negative net cash flow? ›

Negative investing cash flow occurs when a company spends more cash on its investing activities than it receives from them. This means that the company is using its cash to buy or improve its fixed assets, such as buildings, machinery, or technology.

What is a negative cash flow cycle? ›

What Does a Negative CCC Mean? A negative cash conversion cycle means that inventory is sold before you have to pay for it. Or, in other words, your vendors are financing your business operations. A negative cash conversion cycle is a desirable situation for many businesses.

What are the five techniques in cash management? ›

5 Methods to Achieve Better Cash Management
  • Create a cash flow statement and analyze it monthly. ...
  • Create a history of your cash flow. ...
  • Forecast your cash flow needs. ...
  • Implement ideas to improve cash flow. ...
  • Manage your growth.

What are the three main causes of cash flow problems? ›

The main causes of cash flow problems are:
  • Low profits or (worse) losses.
  • Over-investment in capacity.
  • Too much stock.
  • Allowing customers too much credit.
  • Overtrading.
  • Unexpected changes.
  • Seasonal demand.
Mar 22, 2021

How to grow cashflow? ›

10 Tips to Help Improve Your Company's Cash Flow
  1. Anticipate and Plan for Future Cash Needs.
  2. Improve your Accounts Receivable.
  3. Manage your Accounts Payable Process.
  4. Put Idle Cash to Work.
  5. Utilize a Sweep Account.
  6. Utilize Cheap and/or Free Financing Options.
  7. Control Access to Bank Accounts.
  8. Outsource Certain Business Functions.

How to improve cash flow in a business? ›

6 ways to improve cash flow in your business
  1. Use software to track your inflows and outflows. ...
  2. Send invoices out immediately. ...
  3. Offer various payment options for customers. ...
  4. Reduce operating costs. ...
  5. Encourage early payments, while discouraging late payments. ...
  6. Experiment with your prices.

How do you keep cash flow positive? ›

  1. Lease, Don't Buy.
  2. Offer Discounts for Early Payment.
  3. Conduct Customer Credit Checks.
  4. Form a Buying Cooperative.
  5. Improve Your Inventory.
  6. Send Invoices Out Immediately.
  7. Use Electronic Payments.
  8. Pay Suppliers Less.

Why do banks have negative cash flow? ›

This phenomenon can be explained by the fact that commercial banks sell cash. A well-performing bank creates an outflow of cash since it sells more and more cash through lending. Consequently, it should be logical that well-performing commercial banks have negative operating cash flows due to increased lending.

Is negative cash flow from investing bad? ›

Negative cash flow is often indicative of a company's poor performance. However, negative cash flow from investing activities might be due to significant amounts of cash being invested in the long-term health of the company, such as research and development.

Why Amazon has negative cash flow? ›

Amazon's situation may seem alarming at first but it is only upon deeper analysis that we find out why this is not the case. The major reason behind Amazon's negative cash flow is its high capital expenditures and reliance on debt. However, this is simply because it reinvests its profit rapidly in innovative products.

Do banks have negative cash flows? ›

Therefore, a bank's operating cash flow is heavily influenced by changes in its loans, deposits, and other financial assets and liabilities, which can result in a negative operating cash flow in some periods.

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