What is Negative Cash Flow & How to Manage It? (2024)

5 Min. Read

March 29, 2023

What is Negative Cash Flow & How to Manage It? (1)

At different stages of your business, you might experience situations where your expenses outweigh incoming cash. This condition is known as negative cash flow.

Should small businesses worry about negative cash flow? The truth is it depends.

In this article, we would look at the best ways to manage cash flow deficits.

Here’s What We’ll Cover:

What Happens In Negative Cash Flow?

Is Negative Cash Flow Bad?

What are the Reasons for Negative Cash Flow?

How Does Negative Cash Flow Affect Small Businesses?

3 Ways To Recover From Negative Cash Flow

Wrapping Up

More Cash Flow Resources

What Happens In Negative Cash Flow?

Negative cash flow is when there is some lopsidedness in a company’s earnings. In other words, inflow does not match expenses, causing the business to spend more cash than it takes in.

Depending on your company’s operations, you might experience poor cash flow at different points. For one, if you purchase additional equipment for an expanding business, you could outspend your earnings for a period.

Negative cash flow doesn’t always equate to losses—companies can make a net profit but still incur higher expenses than their revenues.

Is Negative Cash Flow Bad?

This is the one time when negative doesn’t necessarily mean bad.

One-off occurrences of negative cash flow are normal and inevitable in business. However, when negative cash flow stretches for months, you should be worried. If your expenses continuously outweigh revenue, it will become for you to meet up with running costs, break-even, and make a profit.

Precisely, you shouldn’t be on pins and needles about cash flow issues if;

  1. You are a new business investing resources to gain popularity in your market.
  2. You are expanding your services to other markets.
  3. The demand for your product is seasonal—for example, a summer clothing line or a Christmas gift shop.

What are the Reasons for Negative Cash Flow?

The first thing negative cash flow tells you is that you’re spending more money than your business makes. When you dig deeper, you could discover that you have;

  1. Increased Expenses and Overhead Costs
  2. Outstanding Customer Payments
  3. Poor Product Pricing
  4. No Realistic Financial Plan

Increased or Unexpected Expenses

Despite having a financial plan for a period, unplanned expenses can crop up, leading you to spend above your cash inflow threshold. For example, if your equipment develops a sudden fault, you need to pay for repairs. Also, if the prices of raw materials bump up, it can increase your overhead costs and upset your revenue-cash flow balance.

Outstanding Customer Payments

Extending credit to customers is a brilliant move, but it can hurt your cash flow in the medium and long term.


When most of your clients do not settle their debts on time, it reduces your revenue significantly. Business owners struggle to meet up with financial commitments because of the sheer volume of pending invoices.

Poor Pricing

Setting up an ideal pricing system for your business isn’t a decision made off the top of your head. If you do this, you could end up overpricing or underpricing your product.

Pricing your product above the market means fewer people will buy from you. Simultaneously, if you’re charging too low, your business might not be profitable. Therefore, it’s best to conduct a feasibility study plus market research first and use this data to fix ideal prices.

No Realistic Financial Plan

Without a well-laid-out budget, it is difficult for a business to meet its financial obligations. The company will have a ton of unplanned expenses that’s way above its revenue. If your cash flow forecast is wide off the mark, it becomes difficult to predict operating costs.

How Does Negative Cash Flow Affect Small Businesses?

Poor cash flow management affects the viability of small businesses, especially when it persists.

Private investors look at your cash flow statement before deciding. If there’s no consistent positive cash flow in your financial statement, investors might become skeptical about your business’s financial health as you cannot guarantee ROI.

Other setbacks include;

  1. Eroded business growth
  2. Inability to meet up with core business expenses
  3. Arbitrary budget cuts
  4. Business losses
  5. Poor or inefficient operations

3 Ways To Recover From Negative Cash Flow

There’s no plug-and-play solution for recovering from a cash flow deficit.

Ultimately, you need to take a keen look at your balance sheet and cash flow statements. Then craft a unique recovery plan to help you achieve healthy cash flow.

Here are a few cash flow recovery tips you can try out:

  1. Cut down your expenses
  2. Streamline your payment terms
  3. Have an emergency stash

Cut Down Your Expenses

Take a hard look at your overhead costs and operating expenses—is there anything you shouldn’t be paying for? For example, consider outsourcing specific tasks instead of hiring someone in-house.

Here, it would be best if you made some hard business decisions. Consider merging job roles, slowing down your investing activities, or working with more affordable vendors and suppliers.

Streamline Your Payment Terms

If your business is ridden with extended debt or bad debt, restructure your payment terms and conditions. Cutting back on credit is a smart way to achieve positive cash flow by encouraging customers to make on-time payments.

Have an Emergency Stash

To help you meet unexpected financial obligations, create an emergency stash for your business. This is the money for sorting out sudden expenses like fixing equipment, credit card fees, and, surprisingly, taxes.

A hack for building up your emergency funds fast without increasing your cash inflow is to cut down cash outflow and divert these funds into your stash.

Wrapping Up

If you’re dealing with negative cash flow, you can apply for business loans to help you cover expenses in the short term. Ultimately, draw up a solid plan to improve your business’s financial situation and get your books back to green.

More Cash Flow Resources

  • What is Unlevered Free Cash Flow?
  • What is the Cash Flow Formula?


What Is BAS (Basic Allowance for Subsistence)?

4 Ways to Increase Accountability in the Workplace

The 7 Best Accounts Payable Automation Software

What is Accounts Receivable Process?

Cash Inflow vs Outflow: What’s the Difference?

What is Negative Cash Flow & How to Manage It? (2024)


What is Negative Cash Flow & How to 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. For example, if you had $5,000 in revenue and $10,000 in expenses in April, you had negative cash flow.

How to handle negative cash flow? ›

3 Ways To Recover From Negative Cash Flow
  1. Cut down your expenses.
  2. Streamline your payment terms.
  3. Have an emergency stash.

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.

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 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

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.

What happens if investing cash flow is negative? ›

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 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.

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.

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.

What is a synonym for negative cash flow? ›

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

Can a profitable business fail because of cash flow? ›

According to a study, 82% of small businesses fail because of cash flow problems. This means that even if a business is profitable on paper, it can still go under if it doesn't have enough cash on hand to pay its bills and expenses.

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

What actions should be taken to improve cash flow? ›

Improve your cash flow
  • Consider your pricing.
  • Increase your sales.
  • Collect cash owed to you faster.
  • Review your expenses.
  • Employ the right people.
  • Manage your inventory.
  • Make your assets work for you.
  • Get advice from a professional.
Jan 18, 2024

How do you avoid negative cash balance? ›

In order to keep the monthly cash flow balance always positive, an essential tip is to plan all internal actions that involve financial costs. Organization is also the key to eliminating unpredictable and unnecessary expenses.

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.

What does negative and positive cash flow mean? ›

Cash flows describe the movement of money and liquid assets on and off a company's books as it makes various transactions. Positive cash flows mean that more money is coming in than going out of a company. Negative cash flows imply the opposite: more money is flowing out than coming in.

What does a negative cash flow mean quizlet? ›

A negative monthly cash flow means that. you are spending more money than you are taking in. for the average person, the single biggest category of expense is. housing. Which of the following is necessary if you want to make monthly contributions to savings?

Top Articles
Latest Posts
Article information

Author: Rev. Leonie Wyman

Last Updated:

Views: 5663

Rating: 4.9 / 5 (59 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Rev. Leonie Wyman

Birthday: 1993-07-01

Address: Suite 763 6272 Lang Bypass, New Xochitlport, VT 72704-3308

Phone: +22014484519944

Job: Banking Officer

Hobby: Sailing, Gaming, Basketball, Calligraphy, Mycology, Astronomy, Juggling

Introduction: My name is Rev. Leonie Wyman, I am a colorful, tasty, splendid, fair, witty, gorgeous, splendid person who loves writing and wants to share my knowledge and understanding with you.