Negative cash flow

Despite how it may feel, a negative cash flow is not a death sentence. But, lets not sugar coat it – its far from ideal , and something you should take seriously.

Thankfully, with the right procedures in place you can improve your cash flow.

On the Agenda:

Understanding Negative cash flow 

Negative cash flows refers to a situation in a business where the movement of money out is greater than the movement of money in.

Cash in and outflows come from various business activities, including operational activities, investment, or financing activities. Together these form what is called a cash flow statement.

A cash flow statement is a financial statement often complemented by the balance sheet and income statement to evaluate financial health.

A common misconception: Cash flow is perhaps somewhat poorly named. Even though ‘cash’ is in the name, cash flows refer to the movement of all funds/money trough a business (not just physical bills/coins).

Is negative cash flow bad?

Yes, and sort of.

Let’s address the obvious first: If you have less money coming into your business than you do coming in, a.k.a negative cash flow, that’s not healthy or sustainable for long term growth, and you’ll need to make adjustments (more or that later).

DYK: A company can still generate profit during a period of negative cash flow. Sounds odd, but its true! Check out our article on the difference between profit and cash flow and why you should track both to see how!

However, negative cash flow isn’t necessary a nail in the coffin, and it is a regular occurrence.

If you already have a cash flow forecast (nice, your already 10 steps ahead of many other businesses) looking at the negative red lines/numbers certainly isn’t fun, but there are legitimate reasons well run business encounter periods of negative cash flow.

Situations where short-term periods of negative cash flow are commonly seen:

  • Your business is in an industry with seasonal cash flows (ex: hospitality, retail, tourism)

    It’s hard for a ski resort’s operating cash flow to be positive in the middle of July.

  • Your business is new, and therefore your spending on establishing your business.

    New businesses regularly spend more than they make in the beginning. Don’t panic, but keep an eye on your cash burn rate and cash runway.

  • You started a big project, or you’re investing in new equipment this period.

    Even if your cash inflows are strong and stable, on occasion, incoming cash can be less than your operating expenses.

  • Your going through difficult times.

    Even renowned business owners can find themselves in the midst of difficult times.

How does negative cash flow affect small businesses?

Poor cash flow management is detrimental even to businesses which survive.

1. Inability to Cover Expenses

If you don’t have a large enough cash reserve a negative cash flow means you won’t be able to cover all of your business expenses.

Depending on the situation the consequences can be relatively small like having to negotiate later bill payment dates, or they can result in larger issues like being unable to pay employees, rent, or force you to incur large amounts of interest.

2. Miss out on Opportunities 

Without cash on hand, and a negative cash flow you’re also unable to capitalize on potential opportunities as they come up.

For example, you may miss out on an exciting new project that requires a large initial investment into things like equipment, hiring staff, and other required assets.

3. Receive less Funding 

Outside of impacting operations, negative cash flow can also affect your ability to receive financing. Private investors check your financial statements (including your cash flow statement) to see where you’re going, and evaluate your ability to pay debt.

If your company’s consistently has a negative cash flow, it could cause investors to become skeptical, invest less, or not at all.

How can I recover from negative cash flow?

And yes its possible!

Early we mentioned your cash flow statement includes cash flows from three different sources:

  1. Operating activities

  2. Financing activities

  3. Investing activities

Of these three, the one you have the most control immediate and direct control over is operating cash flow.

Despite what may or may not being going on behind the scenes in terms of financing and investing activities, you still have control over your day-to-day activities and the processes you have in place.

How to improve your operating cash flow

If your tracking and forecasting you cash flow the first thing you probably though when you saw it dip was something along the lines of:

How did we spend so much this month?!?”


Shoot! We need to sell more

While you can’t magically bring in a boat load of customers, you can get a more bit creative with this idea than perhaps it initially seems. 

First, let’s take a look at:

Accounts Receivable Timing

You may not be able to bring more sales, but perhaps you can move them up.

Consider ways to incentives customers to pay sooner. Common ways to do this include offering a discount for early payment.

For example, if you’re current terms are net 60, consider giving a 10% discount if payment is received within in 30 days. You can also apply a charge if paid late.

Better yet why not shorten the terms altogether? Remember when you make a sale you are covering all the costs until you bring cash in.

This may already have you thinking about what your entire receivables and payment processes look like…

Improving your Accounts Receivable Process

Ideas and question to consider when evaluating your AR process:

  • Are there additional payments options you can provide to your customers?

    A common question we see from small business owners is should they accept credit card payments? Often small businesses shy away from credit cards due to associated fees, but consider the benefit in the ability to collect instantaneous payments.

    The carrying costs of having outstanding accounts receivable is likely higher than the roughly 3% fee credit cards charge.

  • Do you send out bill payment reminders?

    Don’t feel bad about trying to get paid for what you did! Your customers are actually expecting you to invoice them and send reminders.

  • When do you send out the initial invoice? Could it be quicker?

    You can’t get paid in a timely, if you aren’t billing in a timely manner. 

Improving your Accounts Payable Process

Once you have you accounts receivable and cash flow forecasting in order, you’ll know the amount of cash you can expect to flow into your business, and be in a better position to pay when its best for you, not when you need to.

We talked about charging late fees and offering discounts for early payment. Once you have a solid understanding of your process, take advantage of discounts from others when making payments where you can.

For more on cash management, check out our full article on The 3 Levers of Cash Management.

4 steps to manage negative cash flow

Let’s summarize what we’ve seen today and how you can manage a current negative cash flow, and avoid it in the future. We can’t magically conjure up customers, or reduce shipping costs, but we still have options inside of our control. 

4 steps to eliminate and avoid negative cash flows

  1. Create a cash flow forecast

    A cash flow forecast lets you see your future bank balance, manage accounts receivable and payable, test & compare scenarios, and make more informed business decisions.

    If a cash flow forecast is new to you, or your company hasn’t created one yet, check out our free cash flow guide + template where we cover the basics right through to creating a forecast. 

  2. Improve you cash management process

    As discussed, evaluating and improving your accounts receivable and payable processes will help improve the rate you get paid, optimize when you pay, and ultimately contribute to improving a negative cash flow.

  3. Take advantage of tools

    From automated cash flow forecast and bill payments to receipt tracking, and beyond there are a wide variety of tools specifically designed to help at low or no cost.

    As a start check out our list of the Top 10 Cash Flow Apps for Small Businesses.

  4. Build a cash reserve

    So far we’ve seen how you can forecast, plan and mange, but even with the right processes and tools in place every company hits a rough patch from time to time.

    Build a plan to create and maintain a cash reserve that lets you cover future short-term emergencies and downturns. Generally speaking, a healthy cash reserve is three to six months of your operating expenses.

Keep your Head Up

Remember while having a negative cash flow can be stressful its not a death sentence. Even the best business owners, entrepreneurs, and titan’s of industry have faced difficult periods.

Focus on the aspects of your business you can control. Make sure you have the best possible procedures and tools in place to help you and your employees succeed!

Until next time!