What Is Negative Cash Flow, and How Can You Manage it? (2024)

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What Is Negative Cash Flow, and How Can You Manage it? (1)

Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in commercial finance

Negative cash flow can put your business at real risk of financial disaster. That said, with careful management, it needn’t be a disaster.

This guide is here to shed light on the intricacies of cash flow, especially when there’s some lopsidedness in a company’s earnings.

We’ll dive deep into understanding the nuances, the causes, and most importantly, how to manage and control it. So, if you’re a business owner looking for resources and tools to better your financial management, you’re in the right place.

What we cover in this article:

  • What is Negative Cash Flow?
  • Common Causes for Negative Cash Flow
  • How Negative Cash Flow Can Affect Your Business
  • Disadvantages of Negative Cash Flow
  • Practical Solutions and Strategies
  • Prevention and Proactive Measures
  • FAQs

What is Negative Cash Flow?

At its core, negative cash flow is when a business’s cash outflow (the money going out) surpasses its cash inflow (the money coming in). Running a business with negative cash flow can feel like you can see the potential but you’re constantly being held back.

That’s what negative cash flow can feel like for many business owners. But, understanding it is the first step to fixing it.

Understanding the Definition of Negative Cash Flow

To put it simply, negative cash flow occurs when there is more cash paid out by a business than the cash it receives.

It’s essential for business owners to create a cash flow statement, a financial document that tracks the flow of cash in and out of your business.

This statement will give you a clear picture of where your money is going and how much is coming in. Think of it as a financial health check-up. It’s not just about numbers; it’s about understanding the story those numbers tell.

And remember, having a negative cash flow isn’t necessarily a sign of a failing business. It can be a temporary situation, but it’s crucial to address it promptly.

What Causes Negative Cash Flow?

There are several reasons why a business might experience negative cash flow. Let’s break them down:

  1. Recurring Payments: Regular, recurring payments can sometimes be higher than the cash inflow. This is especially true if you’ve set up direct debit payments for expenses, and there’s a delay in your clients’ payments coming in.
  2. Unplanned Expenses: Every so often, unexpected expenses can pop up. Maybe it’s a repair, a sudden tax payment, or an unplanned capital investment.
  3. Poor Accounting and Bookkeeping: Not keeping a close eye on your books can lead to oversights. Using free accounting tools can help small business owners keep track of their finances better.
  4. Late Payments from Clients: If your clients are consistently late with their payments, it can disrupt your cash flow. Implementing a system to track time and payments can be beneficial.
  5. Overstocking Inventory: For businesses that deal with physical products, overstocking can tie up cash that could be used elsewhere.

Understanding the causes is the first step in managing negative cash flow.

As we delve deeper into this guide, we’ll explore how to fix negative cash flow and the best practices that can help business owners stay in control.

Common Causes for Negative Cash Flow

Navigating the financial landscape of a business, small or large, can sometimes feel like a tightrope walk.

One misstep, and you could find yourself in the realm of negative cash flow. But what are the common culprits behind this financial issue? Let’s delve into some of the usual suspects:

  • Inefficient Management of Recurring Payments: If your business has a myriad of recurring payments set up, especially through direct debit, it can sometimes overshadow the cash inflow. It’s like setting a clock but forgetting to wind it up; eventually, it will stop ticking.
  • Lack of Control Over Expenses: Spending money on would-likes that work against your business’s best interest can quickly drain your resources. It’s essential to differentiate between ‘need-to-haves’ and ‘nice-to-haves’.
  • Delayed Payments from Clients: Time is money, and when clients delay their payments, it can disrupt the rhythm of your cash flow. Implementing tools to track time and payments can be a game-changer here.
  • Over-ambitious Investments: While investing in your business is crucial, overextending without a clear ROI can lead to financial strain. Remember, every penny spent should have a purpose.

How Negative Cash Flow Can Affect Your Business

It’s not just about the money; it’s about the ripple effect it creates. Here’s how it can impact your business:

  • Strained Business Operations: Cash is the lifeblood of any business. When it’s in short supply, essential operations can suffer, from purchasing inventory to paying salaries.
  • Limited Growth Opportunities: Expansion and growth require capital. A negative cash flow can stifle opportunities, making it challenging to scale or invest in new ventures.
  • Damaged Business Reputation: Consistently struggling to meet financial obligations can harm your business’s reputation. It can lead to strained relationships with suppliers, creditors, and even customers.
  • Increased Debt: To bridge the cash gap, businesses might resort to borrowing, leading to increased liabilities and interest payments.

Disadvantages of Negative Cash Flow

While we’ve touched upon the effects, it’s essential to understand the deeper disadvantages of negative cash flow:

  1. Reduced Business Valuation: Investors and banks gauge a business’s health by its cash flow. A consistent negative trend can reduce your business’s valuation, making it challenging to secure loans or attract investors.
  2. Loss of Business Control: Relying heavily on external financing means answering to creditors. This can sometimes lead to loss of control over business decisions.
  3. Operational Inefficiencies: Cash constraints can lead to cutting corners, leading to reduced quality of products or services.
  4. Employee Morale and Turnover: Financial instability can lead to delayed salaries, affecting employee morale and leading to higher turnover rates.

Practical Solutions and Strategies

Any seasoned business owner will tell you, it’s not about the challenges you face, but how you tackle them.

And when it comes to managing negative cash flow, there’s a number of strategies and solutions just waiting to be unearthed. So, let’s dive in, shall we?

How to Fix Negative Cash Flow

The age-old question that keeps many a business owner up at night: how to turn the tide when cash flow goes negative?

Here are some tried and tested steps:

  1. Invoice finance:Invoice finance allows you to borrow against your outstanding invoices, thus improving your cash flow. Invoice finance can be broken down into two main products, invoice factoring and invoice discounting. Whichever option you choose, your business bank manager will usually thank you for the big improvement in cash flow!
  2. Create a Cash Flow Statement: First and foremost, you should get a clear picture of your financial situation. A flow statement will help you understand where your cash is coming from and where it’s going.
  3. Reduce Unnecessary Expenses: It might sound obvious, but it’s surprising how many businesses small and large spend money on would-likes that work against their best interest. Time to trim the fat!
  4. Speed Up Client Payments: Implement tools to track time and payments. Offer incentives for early payments and consider setting up direct debit for recurring clients.
  5. Negotiate with Suppliers: Sometimes, a simple conversation can lead to extended payment terms or discounts.
  6. Review Pricing Strategy: Are you charging enough? It might be time for a price adjustment.

Survival Strategies to Manage Poor Cash Flow

When the going gets tough, the tough get strategic. Here are some survival strategies for those particularly challenging times:

  • Prioritise Payments: Not all expenses are created equal. Prioritize payments to essential suppliers and services.
  • Consider Short-Term Financing: While not ideal, a short-term loan or line of credit can provide a temporary cash inflow to tide you over.
  • Renegotiate Contracts: Whether it’s a lease agreement or a service contract, consider renegotiating terms to ease cash flow constraints.
  • Delay Capital Expenditures: Hold off on major purchases or investments until your cash flow stabilizes.

Strategies to Improve Cash Flow and Grow Consistently

Growth and consistent cash flow go hand in hand. Here’s how to ensure both:

  1. Monitor Cash Flow Regularly: Just as you’d regularly check your car’s oil, you should keep a close eye on your cash flow. Use accounting tools and resources to help you stay on top of it.
  2. Diversify Revenue Streams: Don’t put all your eggs in one basket. Explore new revenue streams to ensure a consistent cash inflow.
  3. Build a Cash Reserve: Think of it as a rainy-day fund. A cash reserve can be a lifesaver during unexpected downturns.
  4. Invest in Financial Education: Consider attending workshops, reading books on financial management, or even hiring a financial consultant. Knowledge is power, after all.

In the world of business, cash is king. And with these strategies in your arsenal, you’ll be well-equipped to manage, control, and even thrive in the face of cash flow challenges.


Imagine Sarah, a passionate business owner of a small boutique. She’s got flair, a loyal clientele, and a keen eye for trends. But, like many business owners, she occasionally grapples with the ebb and flow of cash.

One month, she’s on a high with a positive cash inflow, and the next, she’s scratching her head, wondering where all the cash went. She realises that while her sales are consistent, her cash flow is not. Why?

A deeper dive reveals that while she’s been spending money on would-likes, some clients delay their payments, and recurring expenses via direct debit are taking a toll.

By creating a cash flow statement, Sarah gets a clearer picture and begins her journey to manage and control her finances better.

Keep reading – How invoice finance is transforming the recruitment industry.

Prevention and Proactive Measures

The adage of “better safe than sorry” rings especially true when it comes to managing negative cash flow. Let’s delve into some proactive measures and tips to keep your cash flow in the green.

How to Prevent Negative Cash Flow

  1. Regular Monitoring: Just as a doctor would recommend regular check-ups, you should consistently monitor your cash flow. Use free accounting tools to help you keep track of cash inflow and outflow.
  2. Establish Clear Payment Terms: Set clear payment terms with your clients. Consider offering discounts for early payments or imposing penalties for late ones.
  3. Manage Inventory Efficiently: For businesses dealing with products, avoid overstocking. It ties up cash that could be used elsewhere.
  4. Review Recurring Payments: Regularly review and assess recurring payments. Ensure that you’re not paying for services you no longer use.
  5. Budget and Forecast: Plan your expenses. Anticipate future costs and potential revenue to ensure you’re prepared for any financial surprises.

Tips for Avoiding Cash Flow Issues

  • Stay Educated: Keep yourself updated with the latest in financial management and bookkeeping. Knowledge, after all, is power.
  • Build Strong Relationships with Suppliers: A good rapport can lead to better payment terms and even discounts.
  • Diversify Your Client Base: Don’t rely too heavily on one or two big clients. A diverse client base ensures a more consistent cash inflow.
  • Use Technology: Embrace modern tools and resources. From tracking time to managing payments, technology can be a game-changer.
  • Seek Expert Advice: Sometimes, an external perspective can offer invaluable insights. Consider consulting with a financial expert or accountant.

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Let’s dive into some of the most frequently asked questions.

Continuous negative cash flow, if left unchecked, can have a domino effect on a business.

Here’s what you should be wary of:

  • Stunted Business Growth: Without the necessary cash, it becomes challenging to invest in growth opportunities, be it expanding your product line or entering new markets.
  • Increased Debt Burden: To bridge the cash gap, businesses might resort to borrowing, leading to a mounting pile of debt and interest payments.
  • Operational Challenges: From paying salaries on time to replenishing inventory, a lack of cash can disrupt day-to-day operations.
  • Damaged Business Reputation: Consistently struggling to meet financial obligations can tarnish your business’s image in the eyes of suppliers, clients, and stakeholders.
  • Potential Bankruptcy: In extreme cases, prolonged negative cash flow can lead to insolvency or bankruptcy.

Late payments are the bane of many a business owner’s existence. Here’s how it can exacerbate problems:

  • Delayed Operational Activities: Cash is the fuel that keeps the business engine running. Late payments can delay essential activities like restocking inventory or paying suppliers.
  • Increased Borrowing: To compensate for the cash shortage, businesses might need to borrow, leading to interest costs.
  • Strained Business Relationships: Continuously chasing clients for payments can strain business relationships and lead to a loss of trust.
  • Reduced Cash Inflow: Delayed payments mean reduced cash inflow, leading to potential cash flow issues.

Forecasting is a key tool to get a picture of your business’s financial trajectory. Let’s unravel the significance of cash flow forecasting, shall we?

  • Anticipating Peaks and Troughs: By forecasting, you can anticipate periods of positive and negative cash flow, allowing you to prepare accordingly.
  • Informed Decision Making: With a reliable forecast, you can make informed decisions about investments, expansions, or even cutting back on certain expenses.
  • Building Trust with Stakeholders: Regular and accurate cash flow forecasting can build trust with stakeholders, be it investors, banks, or even your employees. It shows that you’re in control and have a clear vision for the future.
  • Identifying Potential Issues: Forecasting allows you to spot potential cash flow issues before they become critical.

Here’s how they can influence your cash flow:

  • Return on Investments (ROI): Wise investments can provide a steady cash inflow, bolstering your cash reserves. But, as with all things, there’s a risk. Poorly chosen investments can drain your cash, leading to negative cash flow.
  • Bank Fees and Charges: Proper bank account management means being aware of any fees or charges that might be nibbling away at your cash.
  • Access to Overdrafts and Loans: A well-managed bank account can provide access to overdrafts or loans during times of need, acting as a safety net for your cash flow.
  • Interest on Savings: Some bank accounts offer interest on savings, leading to a passive cash inflow. It’s like planting a tree and enjoying its fruits year after year.

Let’s delve into the benefits of planning for a steady expansion:

  • Sustainable Growth: A steady expansion ensures that growth is sustainable. It’s like watering a plant regularly—you’d want it to grow, but not so fast that it withers away.
  • Controlled Expenses: By planning, you can ensure that expenses related to expansion are kept in check. No one likes unexpected bills, after all.
  • Improved Cash Flow Management: A steady expansion means you can anticipate the impact on cash flow and plan accordingly. It’s like knowing the depth of a river before diving in.
  • Building a Loyal Customer Base: A well-planned expansion can lead to a broader customer base without alienating your existing clientele. It’s like adding more chairs to a table without making anyone feel squeezed out.
What Is Negative Cash Flow, and How Can You Manage it? (2024)


What Is Negative Cash Flow, and How Can You Manage it? ›

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.

How do you 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 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.

How do you recover from negative cash flow? ›

Some ways to reduce your expenses and increase cash flow may be:
  1. renegotiating contracts or terms with vendors.
  2. have smaller inventory on hand.
  3. take a look at recurring monthly expenses, such as software and licenses.
  4. evaluate discretionary expenditures, such as marketing, supplies, or travel-related costs.

How do you solve 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.

What happens when a business has a negative cash flow? ›

If a company is constantly reporting negative cash flow, it is either overinvesting or losing money over time which is certainly not a good sign. This can lead to unpaid bills and increased layoffs.

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 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.

Do you discount negative cash flows? ›

Negative cash flows can reduce the value of an asset or project, as they indicate lower returns or higher risks. To deal with negative cash flows in DCF analysis, you need to do two things: project them accurately and discount them appropriately.

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.

What is a synonym for negative cash flow? ›

nounas in spending in excess of revenue or income. budget deficit. compensatory spending. debt. debt explosion.

How can business improve cash flow? ›

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 will you treat if there is a negative cash flow in calculating the DCF? ›

To deal with negative cash flows in DCF analysis, you need to do two things: project them accurately and discount them appropriately. Projecting negative cash flows accurately requires a realistic assessment of the business's performance, growth potential, and cash conversion cycle.

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