About 82% of small businesses that fail experience cash flow problems.
All businesses need to generate profit, but that doesn’t happen 100% of the time. Most businesses experience negative cash flow at some point, but if it’s managed properly, it won’t be a major issue.
In this guide, we’ll go over everything you need to know about managing negative cash flow. Keep reading for more.
What Is Negative Cash Flow?
Negative cash flow is a period in which a business spends more money than it makes. This is an indicator of an imbalance in the revenue stream, but it doesn’t always mean there’s a loss. It usually shows that expenditures and income have been temporarily mismatched.
Among business problems, this is one of the more common – especially for newer, smaller businesses. It takes time to start making a reasonable income, so in many cases, negative cash flow can’t be avoided.
Causes of Negative Cash Flow
There are various things that can cause negative cash flow. Some of the most common are:
- Low profits
- Overinvesting
- Expedited growth
- Unexpected financial expenses
- Expensive overhead costs
- Past-due customer payments
- Too low or too high product pricing
- Poor financial planning
Some of these are unavoidable, but with proper planning of your business finances, you can minimize the effects to help prevent negative cash flow.
Managing Negative Cash Flow
There are all sorts of things you need to consider when managing funds for your business. If you want to keep negative cash flow to a minimum, these tips will come in very handy.
Effective Ways to Manage Your Cash Flow
Be Mindful of Spending and Investing
There are likely to be various resources you need for your business. This typically includes things like employees, equipment, and software, but there can be a lot more depending on the nature of your business. Before making purchases, you should always consider the needs of your business, and take into account the current financial situation.
When it comes to buying anything new, it can be helpful to create 2 separate lists: “would like” and “must have”. When trying to manage negative cash flow, you can then make purchases based on what you’ve prioritized.
In general, the most important expenses are anything you need to keep your business operating and help you generate more profits. In most cases, this consists of things like software, projects, and equipment.
Regularly Create Cash Flow Statements and Forecasts
It’s essential that you keep track of finances if you want to manage them efficiently. Cash flow takes into account all funds going into and out of your business over a specific period.
When the cash flow is healthy, fluctuations in revenue and operating expenses should match. A cash flow forecast is key to maintaining a healthy cash flow. You can create a cash flow statement from your current cash flow to generate more reliable projections.
As a guideline, it’s generally a good idea to perform a cash flow analysis about once a month. This will help you ensure there’s enough money coming in for the next month. Depending on your business you may be fine doing this quarterly instead of monthly.
These forecasts are similar to regular business budget plans. Proper forecasting will provide a better idea of your working capital and expectations. It can also offer a picture of future financing activities so that you can determine what expenses are within your budget.
Regularly Review Outgoing Expenses
Within all businesses, some expenses don’t change much, and others can change a lot. You should be actively monitoring these so that you can gather full business spending insights. This will give you more control so you can avoid significant financial issues.
You can begin by taking a record of any overhead costs. Asses which ones are essential and which ones you could eliminate or replace with a more cost-effective option.
Follow the same process for operating expenses. Doing this monthly or quarterly will help you stay on top of your business finances.
What Expenses Are Included in the Cash Flow Statement?
Reduce Expenses
One of the main causes of negative cash flow is overspending on expenses. This is why it’s so important to analyze expenses and determine what’s most and least important. With a full review, you should be able to eliminate things your business doesn’t need, or look for more cost-effective alternatives.
When doing this, it’s important to not eliminate anything vital to business operations. Doing so can cause more harm than good, leading to more significant losses. If you’re struggling, seeking out a professional for accounting help will make it easier to manage your expenses effectively.
You can also use your cash flow forecasts to help here. They give you an idea of financial shifts, so you’ll be able to explore new ways to run your business that could be more cost-effective.
Create an Emergency Budget
While you might have things planned out very well, there’s always a chance of unexpected operating expenses. Some essential equipment might break down, for example, and you can’t continue working without it. Having an emergency fund will ensure you’re covered in such situations.
It can be a good idea to put a small amount aside each month towards your emergency fund. Cutting out unnecessary expenses will allow you to add more to ensure you can pay for any unexpended issues as soon as they arise.
Help With Managing Your Business Finances
Managing things like cash flow, business taxes, and expenses can be difficult, especially as your business grows. Seeking professional assistance is one of the best ways to ensure you can stay on top of things to maintain the best cash flow at all times.
Basta+Croop is a professional firm based in Charlotte, NC, that offers accounting advice, tax services, and more. Take a look at our services page to learn more about how we can help your business.