Negative cash flow is the situation where a company’s cash outflows exceed cash inflows during a certain period, putting the business under financial strain even if the company is still making sales. For many small business owners, cash flow stress appears long before profitability issues. A business can be running and making sales, yet still struggle to pay suppliers, salaries, or rent.
If you want to keep your company’s financial health, you must understand what causes negative cash flow and its effects. Through this article, you will be familiar with the common causes of negative cash flow and discover five realistic ways to handle it properly so that your business can save money, keep expenses under control, and make lucrative financial decisions.
What is Negative Cash Flow?
Negative cash flow happens when your business spends more money than it receives over a specific period, e.g., when expenses like rent, wages, and electricity are greater than the income from customers.
When that happens, sales alone cannot support day-to-day operations, and the business must rely on external funding, such as loans, investments, or savings, to stay afloat.
It is very common for new or fast-growing businesses to experience negative cash flow. Nevertheless, if this situation lasts for an extended period of time, the profit from sales may not be enough to cover operating expenses, and the company may go bankrupt and experience financial difficulties.
Is Negative Cash Flow Bad?
Negative cash flow does not always indicate that your business is in trouble. In some cases, it is simply part of how a business grows.
A single month of negative cash flow is completely normal, and most companies experience it at some point. The real concern begins when the pattern continues for several months in a row.
If your expenses consistently exceed your revenue, it becomes difficult to cover operating costs, break even, and eventually turn a profit.
In other words, negative cash flow is not something to panic about when:
- You are a new business that is investing heavily to build awareness and attract customers.
- You are expanding your services or moving into new markets.
- Your product or service experiences seasonal demand, such as a tax preparation service or a wedding planning service.
Common Causes of Negative Cash Flow
Negative cash flow usually stems from common business challenges, and understanding the causes helps you address the problem before it worsens.
Below are the most common reasons businesses experience negative cash flow:
Rising or unexpected business expenses
Even if you create a financial plan for the month or quarter, unplanned expenses can suddenly show up. These surprise costs push spending beyond the cash coming in.
For example, if a machine breaks down and needs repairs, or if the price of raw materials increases without warning, your operating costs rise, and the balance between revenue and expenses is disrupted.
Ineffective or incorrect pricing strategies
Pricing directly impacts your cash flow. If your prices are too high when compared to the market, customers may choose alternatives (and potential sales drop). If your prices are too low, the business may not generate enough profit to cover expenses.
This is why you should set the pricing based on market research, competitor analysis, and a clear understanding of costs and profit margins.
Delayed or unpaid customer invoices
Offering credit or long payment terms can help close sales, but it can also create cash flow problems later. When customers do not pay on time, the business’s revenue decreases, and it does not receive the cash needed to run its operations.
A stack of unpaid invoices can make it difficult to pay suppliers, salaries, utilities, and other financial commitments.
Lack of a realistic financial plan
A business cannot maintain its financial commitments if it does not have a clear budget. Unexpected expenses may rapidly accumulate and surpass your income. If your cash flow projection is off, it will always be difficult to anticipate your operating costs.
How Negative Cash Flow Impacts Small Businesses?
Poor cash flow management can weaken the stability of a small business, and the situation becomes even more serious when it continues for a long period of time.
Before investors put their money into your business, they need to see whether your business has strong cash flow by examining your cash flow statement. If your financial statements show inconsistent or negative cash flow, investors may doubt the business’s financial health and question whether they will see a return on their investment.
Ongoing cash flow problems can lead to several other drawbacks, including:
- Slower business growth
- Difficulty covering essential operating expenses
- Financial losses
- Sudden budget reductions
- Disrupted or inefficient operations.
How to Manage Negative Cash Flow?
Managing negative cash flow requires understanding where the problem comes from and taking proactive steps to correct it. Here are five effective ways to manage negative cash flow:
Review your cash flow sources
Start by identifying why your cash flow is negative. Find out if you are running at a loss from your operations, or if your income and expenditures are not in balance.
Negative Cash Flow from Operations
Review your cash flow statement to identify negative cash flow from operations, concentrating on the difference between operating cash inflows (for instance, receivables collections) and outflows (for example, payables payments).
A negative result means you’re spending more than you earn and may need to increase sales or cut expenses. A positive result is a good thing; however, there can still be cash problems in the short-term caused by timing gaps between receivables and payables, which can be resolved by better scheduling.
Negative cash flow from assets
Negative cash flow from assets occurs when a business invests heavily in long-term assets like equipment or property. Calculate it using:
Operating cash flow – Net working capital – Capital spending.
A negative result shows that your investments in the future exceed the cash that it generates today.
Renegotiate payment terms
Payment terms may have a major impact on your cash flow. For customers, consider shortening the time they have to pay invoices. Also, negotiate with your vendors about your payment terms. Some vendors may be willing to give you extra time to pay your invoices. You can also ask if they can set up a payment plan to split the total amount due into smaller, more manageable installments.
Consult with lenders
If you need extra funds to cover expenses, consider financing options. Banks offer small business loans, and the Small Business Administration supports loans that meet their guidelines, making approval easier.
Another option is a business credit card for short-term expenses, but be sure to check interest rates and pay off balances quickly to avoid debt accumulation.
Cut down on operating expenses
It is always a good idea to review all your expenses and find ways to reduce costs in different areas. Confirm that you are not paying more than necessary for any supplies or services. By comparing different vendors or negotiating your prices, you can still save money without any impact on your operations.
Boost revenue through increased sales
More sales bring more money into the business. To increase your sales, you can get rid of old inventory by offering it at a discount or as a promotion, broaden your product line, sell your goods online, or go to new markets.
Negative Cash Flow FAQs
Here are some frequently asked questions about negative cash flow:
What are the strategic risks of ignoring negative cash flow?
Neglecting negative cash flow may result in non-payment of bills, an increase in debt, interruptions in operations, and eventually the risk of the business shutting down.
Can negative cash flow ever be part of a growth strategy?
Yes, it is possible that a company’s cash flow might be negative for a short period of time if it is spending on expansion, new products, or assets that will bring higher returns later on.
How can founders use cash-flow KPIs to prevent future negative cash flow?
By monitoring KPIs (key performance indicators) such as days sales outstanding, current conversion cycle, and cash-burn rate, founders are able to spot the trends beforehand and take the initiative to make financial changes.
How frequently should small businesses monitor cash flow?
Small businesses need to go through their cash flow at least on a monthly basis and keep updating their forecasts regularly if they want to be able to spot problems before they become serious.
Get cash flow clarity with Cheqly
Many small businesses struggle more with unpredictable or poorly managed cash flow than with a lack of customers. Even profitable operations can face shortages, missed payments, or stress without the right tools. Cheqly, a neobank, solves this problem by providing a clear picture of your business finances. With accurate financial reports, the company can track its money, determine the sources of cash flow, and manage cash flow using a user-friendly dashboard. As a result, business owners are empowered to make informed decisions and avoid unexpected financial issues.
Get your Cheqly business account today and manage your cash flow with confidence.