What Is Negative Cash Flow, and How Can You Manage it?

Every business owner knows that cash flow is king. From start-ups to blue-chips, healthy cash flow mechanics are the secret to successful business finance.

But what about negative cash flow? What does that even mean, and is it an automatic red flag for your business?

In this guide, we’ll cover everything you need to know and look at handling negative cash flow when it’s unavoidable. Let’s get to it.

What is negative cash flow?

Negative cash flow happens when a business’s outgoings (expenses) exceed its income during a certain period.

Basically, spending exceeds income, and cash outflows from the business exceed inflows.

The term ‘negative cash flow’ tends to be associated with business transitions, but it can apply to individuals, too. 

Understanding different types of cash flow

Understanding the primary types of cash flow can help us to better understand negative cash flow as a concept. There are three types to know:

1. Operating cash flow, which is generated from sales and other regular business operations.
2. Financing cash flow, which is received or paid to creditors and investors. This can take the form of loans, dividends or equity finance.
3. Investing cash flow, which relates to cash received from, or spent on, long-term investments such as stocks, property, or major equipment (such as manufacturing machinery).

Which type of cash flow matters most?

All types of cash flow matter to the business.

However, if there’s a negative operating cash flow, this tends to be a major concern. Why? Because it relates to the core operation and financial health of your business. 

How is negative cash flow discovered?

A negative cash flow situation will be flagged in the business cash flow statement. This financial report is designed to track the business’s money movements, and it exists for this very purpose. 

What does negative cash flow mean in the cash flow statement?

If the cash flow report shows a negative position, the business may struggle to meet its payment obligations in full for the current period. These can include rent, payroll, supplier invoice payments, and utilities.

This occurs because the business does not have enough liquid cash assets.

What are liquid cash assets? Physical currency, money in savings and banking accounts, short-term liquid bonds and money market accounts. Essentially, assets that can be readily exchanged or sold for cash. 

Finance your cash flow with invoice factoring or invoice discounting.

What creates negative cash flow?

Businesses experience negative cash flows for different reasons. If the cash flow report shows an issue, decision-makers will analyse the figures and underlying drivers. This will help them identify the best course of corrective action.

Common causes of negative cash flow include:

1. Poor sales or revenue

Income drops are an obvious cause of negative cash flow. Poor sales can occur for many reasons, some of which may be beyond the control of the business. For example, clothing retailers often struggle with sales during periods of unseasonal weather.

2. High operational costs

When business costs are high (such as rent, wages, utilities or materials), cash flow may tip into negative territory. Even the highest sales will struggle to achieve a positive net cash flow if business costs are out of control.

For example, many UK manufacturing businesses are currently struggling with high energy costs, which is impacting their ability to remain cash-flow positive (and profitable).

3. Debt servicing

Poor debt servicing can be a cause. If businesses have high-interest loans, multiple loans with frequent repayments, and thin profit margins, this can erode cash reserves. Better debt structuring can be the key to improvements here.

4. Asset investments

If a business spends too much on assets such as real estate, inventory or equipment, the cash reserves can drain quickly and lead to a cash flow shortfall. This may be short-lived or sustained, depending on the broader financial picture.

For this reason, many businesses use specialist asset finance to spread the cost of big-ticket asset investments.

5. Fast growth

If a business scales rapidly without financial planning and provisions in place, costs can increase and hamper revenue growth.

6. Delayed payments on accounts receivable

If customers are slow to pay their invoices or default on payments, your incoming cash flow will slow. Late payments and failed payments are a big problem for businesses, and can be damaging even if the sales position looks strong on paper. 

Is negative cash flow an automatic red flag?

Think of negative cash flow as your warning sign, rather than a cue to panic.

The key to assessing negative cash flow is to understand its causes. Most businesses will have times when they see a negative figure in their reports. For example:

• Businesses may experience seasonal fluctuations and temporary sales downturns due to economic factors beyond their control.
• Businesses might experience a downturn because of an internal operational problem, such as a significant downturn, costing money and requiring investment in replacement machinery.
• A startup might experience negative cash flow after paying for a large advertising campaign or a product launch.
• A seasoned, growing business might experience negative figures after acquiring a new office to accommodate its growing workforce.

In its own right, a negative cash flow figure won’t tell decision-makers what’s happening in the business. But it will flag that further investigations are needed to pinpoint what’s happening. 

When to be concerned about negative cash flow

Most business owners and managers will be concerned when they see:

• Multiple instances of negative cash flow, suggesting that the business model itself might not be sustainable
• Sustained periods of negative cash flow, requiring operational adjustments.
• Low cash reserves, which suggests incoming payments are continually failing to keep up with expenses.
• Excessive inventory levels, which can tie up cash better used elsewhere, and signal overstocking.
• Over-reliance on borrowing, particularly if debt is expensive and could be better structured or shifted to more competitive products such as a business loan.

What are the outcomes of negative cash flow?

Again, this depends on context. A short, expected cash flow dip is unlikely to be a cause for concern. However, if negative cash flow persists and isn’t addressed, it can lead to difficulties for the business.

Typical issues include:

• A damaged credit rating
• Inability to pay staff or bills (including rent and suppliers)
• Reputational damage, from the above
• Expensive emergency loan debt
• Loss of confidence from investors
• Possible bankruptcy

Good cash flow management is essential to survive. Even businesses that look profitable on paper fail because of cash flow issues. 

7 steps to better cash flow management

Don’t wait for negative cash flow issues to become a problem. Implement a proactive cash flow management strategy, as follows:

1. Regularly audit business finances

Whether you’re a business manager or owner, regularly check financial statements, particularly the cash flow statement. Understand where payments are outgoing, and if they balance against incoming receipts.

Identify trends and patterns and ask your accountant or financial manager for context, insight and advice. An interactive financial dashboard can let you dive into the data and see trends and commentary for a richer analytical experience.

2. Boost revenues

Don’t ignore the obvious! Launch that seasonal promotion, incentivise your sales teams, release that new product and authorise that social media marketing campaign!

3. Slash wasteful spending

In the same way that you tighten your belt after Christmas, cut unnecessary costs wherever you see them in your span of control.

Cancel unused subscriptions, question ‘mystery’ costs, outsource if beneficial and consider contract re-negotiations.

The underlying principle is that quality and operational efficiency must be maintained or enhanced. However, most businesses can find cost savings with a keen eye and regular spending reviews.

4. Tackle late payments

See our guide about handling latepayments to get on top of invoices and collections. Follow a managed process to keep on top of delayed payments and recover monies owed.

5. Pause on big-ticket investments

If bigger investments are on the horizon, either pause if possible or spread the cost to help manage your cash flow.

Look at asset finance to help spread payments across the lifespan of the investment. This could be through competitive commercial mortgage financing, for example.

6. Secure a line of credit

All businesses should have access to a line of credit and emergency funding, such as invoice finance, to help handle short-term finance fluctuations. Speak to ABC Finance to find out more.

7. Forecast and collaborate

Invest in good financial reporting tools to project future cash flows. This will help you prepare for ups and downs and better manage working capital.

Ensure that cash flow is a regular topic at management meetings and collaborate with staff across the business to find ways of continuously improving the business’s cash flow.

Don’t ignore front-line staff either! You’ll be amazed at the ideas that colleagues in the warehouse, shop floor, or call centre come up with – remember, they deal with operational issues at the sharp end and see everything first-hand.

Key thoughts on negative cash flow

Most businesses will experience negative cash flow at some point, for different reasons.

The value of this important financial indicator lies in its context. If you see a negative cash flow in your business reports, always investigate it.

Knowledge is power, and if you spot cash flow issues quickly, it’s far easier to fix them and keep your business on track.

Keen to find out more about tools and financial solutions that can help your business weather cash flow fluctuations? Speak to the friendly team at ABC Finance today, and find out more.