Maintaining a healthy cash flow is crucial to the financial health of your business. Similar to the heartbeat, it circulates your company’s lifeblood and ensures it is financially stable. In essence, cash flow refers to the real-time money that goes in and out of your business. Companies often use cash flow management software to track their finances. A sustained negative cash flow can damage the financial relationships you have with investors, suppliers, employees, and customers. Read on to learn more about negative cash flow, its causes, and how to manage it.
Negative cash flow occurs when a business’s cash outflow exceeds its cash inflow, meaning it spends more than it earns in a given timeframe. However, having negative cash flow does not necessarily mean the business is not doing well. It is quite common for new companies or those expanding and investing in growth solutions. The constant negative cash flow is cause for concern.
For instance, suppose Company ABC, a health supplement manufacturer, recently started doing business. In that case, a negative cash flow statement shows that the company spent more than it earned. The negative cash flow in the example is due to negative investing and financing activities. Still, after reviewing its core profit-generating operations, it is doing well, with a positive cash flow from operating activities.
Miscalculations, unnecessary investments, and mismanagement of resources lead to disrupted cash flow. Poor financial planning, higher operating expenses, lower sales revenue, outstanding receivables, unfavorable product pricing, overinvestment, and unexpected or increased expenses are some common reasons for negative cash flow. You can prevent these problems by frequently forecasting future cash flow, reviewing and reducing expenses, and having emergency savings.
In managing negative cash flow, you can turn to business loans to cover payroll and stabilize cash flow. Short-term loans provide instant cash access, ideal for one-off solutions. A business line of credit can help well-established companies with good credit, while invoice financing can help companies with irregular cash flow. With these options, small business owners can navigate cash flow and payroll issues when they arise.