Everything You Wanted to Know About Negative Cash Flow and How to Manage It | Jordensky

Everything You Wanted to Know About Negative Cash Flow and detailed guide to manage negative cash floe situation in your business

Everything You Wanted to Know About Negative Cash Flow and How to Manage It | Jordensky

What is Negative Cash Flow and How to Manage It?

You can come across circumstances where your outflow exceed your inflow of funds at various points throughout the life of your company.

Should tiny companies be concerned about their cash flow? In actuality, it depends.

We'll examine the most effective techniques to deal with cash flow shortages in this article.

What We'll Cover Is As Follows:

  • 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

What Happens In Negative Cash Flow?

When a company's earnings are unbalanced, it has negative cash flow. In other words the business spends more money than it brings in since income does not equal outgoing costs.

Poor cash flow may occur at various times depending on how your business is run. For starters, if your business is growing and you buy more equipment, you can temporarily spend more than you make.

Companies can achieve a net profit while still having larger expenses than sales, which results in negative cash flow.

Is Negative Cash Flow Bad?

Negative doesn't necessarily indicate worst situation for business.

Negative cash flow spikes are common and unavoidable in business. However, you should be concerned if negative cash flow continues for several months. If your costs are consistently higher than your income, it will be difficult for you to cover operating expenses, achieve break-even point, and turn a profit.

Specifically, you shouldn't be anxious about cash flow problems if;

  • You are a startup company spending money to become more well-known in your industry.
  • Your services are being offered in more markets.
  • Your product has a seasonal demand, like a summer apparel line or a holiday gift shop.

What are the Reasons for Negative Cash Flow?

Negative cash flow is your first warning sign that you are spending more money than your company is bringing in. If you look further, you might find that you have;

  • Increased Expenses and Overhead Costs
  • Outstanding Customer Payments
  • Poor Product Pricing
  • No Realistic Financial Plan

Increased or Unexpected Expenses

Unexpected costs may arise even when you have a financial plan in place, causing you to spend more than your cash inflow threshold. You must pay for repairs, for instance, if your equipment develops a sudden malfunction. Additionally, rising raw material costs might raise your overhead expenses and throw off the balance between your revenue and cash flow.

Outstanding Customer Payments

Giving clients credit is a smart choice, but it might negatively impact your cash flow in the long and medium terms.

How?

When the majority of your clients don't pay their debts on time, it dramatically lowers your earnings. Due to the overwhelming amount of unpaid bills, business owners find it difficult to pay their financial obligations.

Poor Pricing

You don't just decide on the spot to set up the best price structure for your company. You can wind up overcharging or undercharging for your product if you do this.

Fewer consumers will buy from you if you price your product higher than the competition. Additionally, if you set your prices too low, your company might not be profitable. So it's preferable to first carry out a feasibility study and market research, then use the information from those studies to set appropriate prices.

No Realistic Financial Plan

It is challenging for a corporation to achieve its financial obligations without a carefully constructed budget. The business will incur a great deal of unanticipated costs that far exceed its revenue. It becomes challenging to forecast operating costs if your cash flow projection is way off.

How Does Negative Cash Flow affect Businesses?

Future viability of a business is impacted by poor cash flow management particularly when it continues.

Before making a decision, private investors review your cash flow statement. Investors may have doubts about the financial stability of your company if your financial statement does not consistently show positive cash flow because you cannot guarantee ROI.

Other setbacks include;

  • Eroded business growth
  • Inability to meet up with core business expenses
  • Arbitrary budget cuts
  • Business losses
  • Poor or inefficient operations

3 Ways To Recover From Negative Cash Flow

There isn't a simple plug-and-play method for overcoming a cash flow shortfall.

In the end, you must carefully examine your cash flow and balance sheet. Then create a special recovery strategy to assist in restoring a healthy cash flow.

You can use the following advice to recover your cash flow:

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

Cut Down Your Expenses

Examine your operating and overhead costs carefully; is there anything you shouldn't be spending money on? For instance, rather than hiring someone internally, think about outsourcing certain jobs.

Making some difficult business decisions would be preferable in this situation. Think of combining employment responsibilities, reducing your investment activity, or dealing with less expensive suppliers and providers.

Streamline Your Payment Terms

Restructure your payment terms and circumstances if your company is burdened with bad or extended debt. Restricting credit is a wise move that will encourage customers to make on-time payments and provide positive cash flow.

Have an Emergency Funds

Make an emergency fund for your business so that you can cover unforeseen expenses. This money is used to cover unforeseen costs like equipment repairs, credit card fees, and, unexpectedly, taxes.

Reduce cash outflow and redirect those monies into your stash as a quick way to increase your emergency reserve without boosting your cash intake.

Wrapping Up

You can apply for business loans to help you pay short-term expenses if your cash flow is negative. Finally, create a sound plan to enhance your company's financial position and get your books back in the black.

About Jordensky

At Jordensky, we are committed to providing an experience of the highest caliber while specializing in accounting, taxes, MIS, and CFO services for startups and expanding businesses.

When you work with Jordensky, you get a team of finance experts who take the finance work off your plate– ”so you can focus on your business.