Negative cash flow: What it is and how to manage it

Dustin Johnson
By Dustin Johnson

It doesn’t matter what your profession is, at the end of the day, business is all about maximizing income while lowering expenses. For many reasons, your business can fall into a spell where the opposite happens. When your business has more money going out than coming in at a given time, that is called negative cash flow.

What is negative cash flow? Does it spell trouble for my business?

Hold on a second. Don’t let such a negative (pun intended) term scare you. This article will do its best to explain negative cash flow and ease your worries. By the end, you’ll see how it’s not always the worst thing as long as it’s only for a short sleep.

We’ll also share a few tips to help you manage it. Let’s get into it.

What is negative cash flow?

Negative cash flow refers to the situation in time where a company’s cash spending is more than cash generated. Generally, cash flow is calculated over shorter time periods than financial metrics like revenue or profit. Revenue or profit shows a business's health over a financial period like a year. Cash flow is a metric that shows how a business does daily or week to week.

Not to belabor the point, but cash flow can be considered a profit or a loss after a subjective period.

So why even bother using cash flow as a metric?

Because there will always be times when your business makes less money than usual. If you do good, there will be times when your business makes more money than usual. Ending the financial year with a profit is nice, but profitable businesses can run into cash crunches too.

Managing the short term means you can always pay employees and vendors on time, consistently invest in your business, and even save money.

Prioritizing immediate cash flow eliminates the excuse of “we’ll make it up later in the year.”

Cash is king, and cash flow is your company’s heartbeat. To further the analogy, you can skip a few beats, but go too long, and your business will suffer.

Is negative cash flow bad?

That last section may have scared you away from the idea of negative cash flow. Don’t let it. If there’s one thing you should take away from this article, it’s this.

| Negative cash flow isn’t the enemy. It’s not immediately knowing when you’re in a period of negative cash flow, now knowing why, and not knowing how to get out of it in a reasonable amount of time.

Negative cash flow can be necessary for some companies. Cash flow can mean a business invests in growth, especially in its early stages. After multiple periods of profitability, a business may decide to invest in new assets like property, technology, or employees. This can have the short-term effect of negative cash flow. Of course, the goal is to increase revenue and return the investment.

These are short-term examples.

If negative cash flow persists for too long, a business will slowly suffocate as it burns through its cash reserves. Ironically, investing too much into your business in the short term can make investing harder down the road.

Managing negative cash flow steps

Is your business in a period of negative cash flow? After a few weeks or months, you are long overdue for a deep financial analysis to figure out what went wrong and how you can fix it. Here’s what to do to manage negative cash flow better.

Find the source

We get it; constantly looking at your finances can put a damper on your more “important” or enjoyable business activities. You cannot fix a financial issue if you don’t know the issue. Systematize your business and break your spending into categories as a preemptive measure—for example, employees, software, tax, rent, etc.

Reduce operating expenses

The #1 way to prevent a spell of negative cash flow is by reducing your operating expenses. Comb through your expense report and find out where your business is spending money where it doesn’t need to.

This sounds ruthless, but one advantage corporations have over small businesses is their attention to detail. Every piece of the business, department to department, has to pull its weight. If your business is losing money, you can’t afford employees that slack off, vendors that underdeliver, or feel-good services that cost more than they bring in.

Negotiate outgoing expenses

Of course, you can’t cancel every subscription and kick every vendor to the curb. For those that you rely on, there is an option of renegotiating payment terms. You can either ask to pay less money or spread out payments over a period of time.

Negotiate terms with customers

In a cash crunch, you should aim to pay as little money as possible as late as possible. You should also shorten the time between customers paying you and increase the amount they pay you.

Many business owners struggle to ask customers for more money or negotiate hard terms. In a cash crunch, there’s no easy way to say this, but you need to get over that! Here’s the only way you need to think about this. If you can’t afford to stay in business, you can’t provide your product or service to your customers.

Find other funding sources

Periods of low sales or high expenses don’t always last forever. It may be tempting to try cracking the code by trying one more sales hack or cutting one more expense. But sometimes you have to admit that you’re doing everything right, but you just need more money and time. 

Look for other funding sources from your bank or the Small Business Administration. Instead of dipping into your personal money, apply for a business credit card. The more funding options available, the bigger your “moat” is around your business.

Increase sales

It’s almost so obvious that it should come with a big “DUH” at the end of it. However, negative cash flow wouldn’t be a thing if increasing sales was so easy. Let’s walk through a few ways to increase sales in your business.

  1. Find new customers
  2. Sell more to your current customers
  3. Expand your service offering to new and existing customers.

If you break things down into these three categories, you can make a plan of attack instead of throwing spaghetti and seeing what sticks.

Forecast regularly

Lastly, there are times when you can avoid a period of negative cash flow by simply seeing it coming ahead of time. Ask yourself, “what did you not do that led to having negative cash flow?” Financial planning is a critical aspect of any business that has growth in mind. $5 you save from cutting out an expense is $5 you can invest later or $5 you can put into an emergency fund for a rainy day.

An example of forecasting is tracking seasonality in a business. A ski resort knows that it may experience negative cash flow during the summer but experience positive cash flow in the winter. Therefore, they know not to overspend during the summer or at least save enough to make practical investments during the down season.

Create an emergency fund

Maybe you’ve reached this point in the article and decided that negative cash flow is inevitable. You can crush it in Q1, but see sales slide in Q2. Because we’re humans, you can make a bad hiring decision or investment. These things happen, but having an emergency budget allows you to take risks knowing you have reserves in case things go wrong.

Tracking and planning ahead is smart business

Slowing down and looking at your finances isn’t always the most fun. But don't we all know that doing so is oh-so-necessary? Can we let you in on a little secret? You don’t have to do it all alone. 

Need help keeping track of your finances? There’s a tool for that.

Need help managing cash flow? There are tools for that.

Need help managing tax schedules? There’s a tool for that too.

That tool is called ComplYant. If the penalties you pay from forgotten tax deadlines are cutting into your cash flow, use our custom calendars and due date reminders to stay on top of every tax deadline.

Dustin Johnson
By Dustin Johnson
Dustin Johnson is a Senior Tax Research Specialist at ComplYant. Prior to joining ComplYant, he spent over eleven years performing tax research at the world’s largest tax preparation company. Dustin holds a Bachelor of Business Administration and a Juris Doctor. Outside of work, Dustin enjoys biking and spending time with his family.

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