What Is Negative Cash Flow? (2024)

As a small business owner, you need to balance income with your expenses. When you track patterns in your spending and earnings, you are looking at your business’s cash flow. Sometimes, your cash flow is negative. What is negative cash flow?

Cash flow explained

To understand negative cash flow, you first need to grasp the idea of cash flow. Cash flow measures what goes in and out of your business during a certain period. For a healthy cash flow, you need to be able to match changes in income with outgoing expenses.

You record your business’s cash flow on the cash flow statement. The statement of cash flows separates cash into three categories:

  • Operations show profit-generating activities
  • Financing shows your business’s liabilities, equity, and debt payments
  • Investing shows the selling and purchasing of assets

Business credit expert and founder of the Business Credit Insiders Circle Marco Carbajo explained the importance of cash flow management in an SBA article:

For every business, the cash flowing into a company is essential for covering the day to day expenses necessary to operate a business. It keeps lights on and doors open; cash flow is truly the life blood of a business. Unfortunately, it’s not uncommon that companies of all shapes and sizes have to slow business growth due to lack of cash flow needed for expansion.

As you track cash flow, you might notice that you sometimes have more outgoing than incoming cash. Other times, you might have more incoming than outgoing cash. Depending on the inflows and outflows of cash, your business will have positive or negative cash flow.

What is negative cash flow?

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.

Negative cash flow is common for new businesses. But, you can’t sustain a business with long-term negative cash flow. Over time, you will run out of funds if you cannot earn enough profit to cover expenses.

What does negative cash flow mean for your small business?

Sometimes, negative cash flow means that your business is losing money. Other times, negative cash flow reflects poor timing of income and expenses.

You can make a net profit and have negative cash flow. For example, your bills might be due before a customer pays an invoice. When that happens, you don’t have cash on hand to cover expenses.

You can’t reinvest cash into your business when you have negative cash flow. Instead, your goal becomes trying to keep your business afloat. Negative cash flow makes it difficult to grow your business.

Negative cash flow example

The following cash flow statement shows one business’s annual cash flow. From the statement, you can see the business has negative cash flow. The business paid more expenses than it brought in income.

Cash Flow Statement

Cash receipts from customers$70,000
Cash paid($50,000)
Cash receipts from sale of vehicle$10,000
Cash paid for equipment($15,000)
Cash paid for loan payment($20,000)
Net Decrease in Cash($5,000)

Figures in parenthesis are negative.

Managing negative cash flow

Long-term negative cash flow is harmful to your business’s finances. There are several steps you can take to improve your cash flow. Try the following tips for small business cash flow management.

#1. Look at the source

First, find out why your cash flow is negative. Determine whether you have a loss from your operations, or if your income and expenses do not match up.

Negative Cash Flow from Operations

To find the source of negative cash flow, subtract payables from your receivables.

Receivables – Payables

If your receivables less your payables results in a negative number, you have negative cash flow from operations. The amount of your income is less than the expenses you must pay. You’re making too little sales or you’re spending too much.

If receivables minus payables is positive, you have a loss because your income and expenses do not match up. You need to adjust the timing of your expenses and income.

Negative Cash Flow from Assets

Alternatively, younger companies might be more likely to have a negative cash flow from assets because of their investment in fixed assets like land or equipment. Cash flow from assets can be found by subtracting capital spending and additions to net working capital from your operating cash flow.

Operating Cash Flow – Capital Spending – Net Working Capital

Having a negative cash flow from assets indicates that you’re putting more money into the long-term success of your company than you’re actually earning.

#2. Negotiate payment terms

You set invoice payment terms with your customers so they know when to pay you. And, you agree to your vendors’ payment terms so you know when to pay them. You can try to adjust either of these types of payment terms to improve cash flow.

For customer payment terms, shorten the number of days customers have to pay you. For example, if you currently give customers 45 days to pay you, shorten the number of days to 30. You should receive invoice payments faster.

Also, talk to your vendors about your payment terms. Certain types of vendors may be willing to give you a longer amount of time to pay invoices. Or, see if the vendor will give you a payment plan and split the balance due into smaller amounts.

#3. Talk to lenders

To make up for low sales, you might need to turn to investments or financing. You can apply for a small business loan through your bank. The Small Business Administration also backs loans for small businesses that meet the SBA loan guidelines. Having the SBA seal of approval should make it easier to secure a loan from the bank.

You could open a business credit card to pay expenses. Check the interest rates before signing the agreement terms. Pay the credit back quickly to avoid accumulating debt.

#4. Reduce operating expenses

Audit your current operating expenses to see if any can be reduced or eliminated. Make sure you’re not paying too much for the products and services you need to run your business. Shop around with other vendors to see if you can get a better deal.

#5. Increase sales

Bringing in more sales will also improve cash flow. You can sell old inventory at a discounted price.

Hold sales and events that encourage consumers to buy larger quantities. You can also expand your business operations. For example, add additional offerings or open your business to online sales.

Need an easy way to track your business’s income and expenses? Patriot’s online accounting software for small business makes it easy to manage your books. We offer free, USA-based support. Try it for free today.

This article has been updated from its original publication date of January 10, 2017.

This is not intended as legal advice; for more information, please click here.

What Is Negative Cash Flow? (2024)


What Is Negative Cash Flow? ›

In simple words, negative cash flow is when there is more cash leaving than entering a business. This is common with new businesses that have high start-up costs and take time to generate cash inflows that exceed investments.

What is a negative cash flow? ›

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.

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?

Is it normal for banks to have negative cash flow? ›

Banks may have negative operating cash flow for a few reasons. First, banks often have a large amount of non-cash items on their income statements, such as depreciation and amortization, which are added back to net income when calculating operating cash flow.

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.

Is negative cash flow good? ›

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.

What does negative and positive cash flow indicate? ›

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.

Is negative cash flow from assets 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.

Can a company survive 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.

What is a synonym for negative cash flow? ›

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

What does negative cash flow from operating activities mean? ›

A negative figure in cash flow from operating activities indicates that the organisation has not been operating profitably and is short of cash to repay its creditors and to find the financing of its asset replacement/business expansion.

Does a negative balance mean you owe money? ›

A negative credit card balance is when your balance is below zero. It appears as a negative account balance. This means that your credit card company owes you money instead of the other way around. Typically, this happens when you've overpaid your outstanding balance or if you've had a credit returned to your account.

What is an example of a negative cash balance? ›

Example: You have 10,000 EUR in cash in your account. You decide to purchase 500 XYZ stocks on the New York Stock Exchange (NYSE), each costing 2 USD. As a result, you will notice a negative position in USD cash equal to - 1,010 USD (commission included).

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 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.

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