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 have a grasp on 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.
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.
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.
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
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.
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.
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 ount 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 payday loans Attica 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
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.