Negative anything isn’t fun for a business (negative reviews, negative customer experiences, just to name a few) but negative cash flow can be detrimental. More money going out of your business than is coming in can mean a lot of things, but it’s definitely something to keep an eye on.
You’re reviewing your cash flow statement and see profit is booming this month. The holiday rush has people shopping, you run some great email marketing campaigns in the backend, and you’re benefiting as a result.
When you look at your money going out? You see you’re still in the red, with more going out than came in. Rent was raised, you had to have extra staff come in to support the rush, and of course you needed more material to meet demand. But the result is a negative cash flow.
Scary, right? Not always—but most definitely something you need to keep a pulse on.
What is negative cash flow?
Negative cash flow when you have more money going out of your business than you have coming in, resulting in negative cash.
For the sake of simple math, say you make $500 at a bake sale. Awesome, right?
But the cost of the materials was $300 (the cost of butter got you good), you spent 8+ hours baking everything (so at the federal minimum wage at $7.25/hour that’s around $58), you spent $75 on packaging for the cookies, and pay $100 for a booth at the bake sale. With operating expenses that high, you actually spent $533 to accomplish $500 in sales.
That’s a negative cash flow—of $33, to be exact.
How do you discover negative cash flow?
The best way to discover if you have a negative cash flow (and get closer to creating a positive cash flow) is by staying on top of your cash flow forecasting. This can be done in different intervals—weekly, monthly, quarterly, or annually. The best method is combining these views so you can see patterns or weaknesses in your cash flow that may be contributing to negative cash flow.
Complete your financial statements by taking all of your money coming in and subtracting all of your money going out. The leftovers are cold, hard cash. If this number is positive, then you have positive cash flow. If this number is negative—you guessed it—you have negative cash flow.
Want to do your cash flow forecasts yourself but spreadsheets and formulas aren’t your strong suit? No problem. Download a copy of our free cash flow forecasting spreadsheet here and make cash flow management a breeze.
Looking for a more detailed guide on cash flow forecasting? We have you covered here.
Is negative cash flow bad?
You would think negative is negative, right? And in a lot of cases it can be.
But you have to look at the circumstances surrounding your negative cash flow to determine if it’s truly bad. Of course, a positive cash flow is always ideal, but there are a lot of cases where the amount of cash you have on hand (or lack thereof, in this case) isn’t the worst thing to happen.
So let’s look at some of these causes, and we’ll let you be the judge of whether they’re good or bad.
What are the causes of negative cash flow for small businesses?
It may seem simple: the cause of negative cash flow is spending too much and not making enough.
And technically, yeah. That is the cause of negative cash flow. But there’s a lot of situations in a business that explain negative cash flow—and like we mentioned above, they may not always be bad.
1. Starting new businesses
Believe it or not, starting your business is actually an example of negative cash flow that is not necessarily bad. The cost of starting a business is steep, and you’re likely to see negative cash flow as you begin to get everything off the ground. Think of all the upfront costs—licensing an LLC (which can cost hundreds), staff hiring, getting your hand on product, running your marketing efforts… and this all has to happen before you make your first sale!
All of this will likely result in fairly low profit. It’s natural, and not something you should be alarmed about when you’re getting up and running. However, you need to re-evaluate if it continues for months with no end in sight.
2. Investment into growth
It’s not cheap to grow your business, whether it’s hiring more staff, investing in new hardware, or finally biting the bullet to sign a lease on a large warehouse space. All of these, while good problems to have, will put a dent in your cash, and therefore your cash flow. In these cases, it’s short term negative cash flow for long term positive cash flow.
3. Poor spending habits
We said the causes are not always bad, but some are. Poor spending habits for your business can be make or break—and a huge negative cash flow cause. If you aren’t understanding your incoming cash, you may overspend (and put yourself into the red). Think springing for ergonomic office equipment before your team is in office, treating clients to lunches at Michelin star restaurants every time you take somebody out, or high-cost team bonding efforts. There are cheaper and equal alternatives that won't rack up your credit cards as much.
4. Late payments
This can be detrimental for invoice-based businesses that typically start the work and share an invoice with the client. Think agency businesses, construction companies, or individual freelancers, for example. When you’re not paid upfront in your work, you can (unfortunately) assume that you’ll experience at least a few late payments from clients. And these late payments mean your cash flow will be off for the month.
5. Emergencies you aren’t prepared for
You may have heard of the importance of having a personal emergency fund for a rainy day, but did you know that you should do the same for your business?
Picture this. You’ve landed some big clients for your construction business, which will be huge in making up some profit. The day before the gigs, you give your employees their assignments, divide materials, and everybody is ready to go—until the check engine light comes on in one of your trucks.
Now you’re paying for an emergency stop at the mechanic ($) and dealing with labor costs on their end ($$) only to find out you need the engine replaced ($$$) and you need this truck to complete the jobs ($$$$).
If you don’t have enough cash aside for unexpected expenses like this, you’re going to throw your cash flow further off course to keep things going. In this case, without an emergency account, where do you take the money from? Max out credit cards? Look into a business loan?
All of those options will impact your cash flow further, maybe even pushing you into a larger deficit that’s harder to get out of. But if you have money aside for emergencies, you don’t have to worry about the cash flow issues that follow unexpected emergencies.
Tips for managing negative cash flow at your small business
So we know what negative cash flow is, if it’s good or bad, and what causes it. But how are business owners managing negative cash flow?
Here are tips for keeping your cash flow problems at bay.
1. Keep a pulse on your financial planning
Understanding the financial health of your business is the first step on staying on top of your cash flow. This can mean:
Reviewing your income statements
Reviewing balance sheets
Completing cash flow forecasting
Making sure bookkeeping is up to date
Going through these exercises will ensure you actually know what your company’s cash is currently at—and what you can spend without going into the red.
This is made even easier with a banking solution that makes cash flow clear. When you know exactly what you have to spend on what, being aware of your planning—and if you're on track or not—is simpler.
2. Minimize payment friction
As a business owner, you know the pain of chasing down an invoice (and the financial headache that comes with waiting for that check to hit your account). Late payments are a thing of nightmares, so trying to minimize the friction when it comes to your customers paying can help reduce late payments.
Try changing your payment terms (offer discounts if they pay early, or add a fee for payment later than 30, 60, or 90 days overdue), review your accounts receivable process, or work with a banking partner that lets checks clear faster. Waiting for “pending” money, even just a few days, can completely throw you off.
3. Build a cash reserve
This can seem daunting, especially when your business is in its startup days. There’s better places for your cash, right?
Wrong! Building a cash reserve is essentially betting on your future success. If you find yourself future-proofing issues, it’s because you believe you’ll still be around to face those future issues. And the future issues are a lot less scary when you’re prepared for them. Having liquidity in the form of cash is key to keeping things smoothly in the face of a financial scare.
4. Review your costs—and see what you can cut
This may seem obvious, but you would be surprised how quickly your operating costs can grow. As your business grows, it’s safe to assume your overhead costs will grow with it.
5. Revisit your loans and interest rates
Haven’t you heard the glorious news? Interest rates are (finally!) starting to decline. Now is the time to revisit your interest rates on your loans. See where you’ll be saving on loans, and re-allocate those savings accordingly.
The other thing you can do is re-evaluate if you want to leverage loans. You may have been avoiding it before with high interest rates, but with the change, it may be the time. Loans can seem scary, but small business owners can benefit from them when used strategically. Unlocking working capital early in your business can help with business growth, letting you scale with ease and get ahead.
Get cash flow clarity with Relay
Sick of seeing a negative in your bank account? Cash flow confusion got you down? Get clarity into your cash flow and business operations with Relay today.
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