What is Negative Cash Flow?

One of the biggest challenges to running a company is maintaining the proper levels of capital necessary to keep operations afloat. Even the most profitable businesses can struggle early on with concerns over cash flow, or the amount of money left for your business after bills, mortgages, and other expenses. 

Negative cash flow occurs when your business has more expenses than revenue in a set period of time. For example, if your lease, utilities, loan payments, cost of goods, and other costs total $10,000, but your income is only $9,000, then your business has negative cash flow. If your business has negative cash flow, you may need to pull capital from savings or obtain financing to meet business needs. 

Normal Causes of Negative Cash Flow

If you do happen to find your business experiencing negative cash flow at any period, the first thing to do is remain calm. There are a number of ways a business can experience negative cash flow without doing anything “wrong” from a business perspective, and there are many ways to solve the issue without harming your company in the long run. Some of the most common causes for negative cash flow within healthy businesses are listed below. 

Misalignment of Expenses and Income

One of the most common reasons for negative cash flow in a business is the misalignment of expenses and income over a given period. Oftentimes, cash flow diminishes over certain periods due to annual tax payments, expenses, or unfulfilled invoices. For example, if you order most of your business supplies during a certain month, your cash flow may appear negative for a short period of time, even though your annual cash flow remains positive throughout the year. 

While occasional negative flows due to misalignment of expenses and income can appear to pose an issue, by planning and setting aside funding for your expenses as they accrue you can ensure that your business does not run into any serious cash flow issue. 

Large Purchases

Similarly, businesses often experience negative cash flow for a period of time when making large purchases or payments. While these large, lump-sum payments will impact balance sheets for that period, it often does not pose any danger for the business. For example, if you purchased a new oven in July, your cash flow for that month would likely be negative just because of the high price of your purchase. The next month, however, your cash flow may well be back to normal or even improved due to the business generated with your new oven. 

Purchasing assets like property and equipment are necessary to keep most businesses running. Experiencing periodic negative cash flow due to these purchases is nothing to worry about, unless such purchases frequently outweigh your revenue. For some situations, pursuing equipment financing may be beneficial by providing the business access to necessary equipment while paying back the purchase over a more manageable timeline. 

Seasonality

Another reason that many healthy businesses experience negative cash flow is due to seasonality. Ski resorts, tourist attractions, and businesses tied to professional sports teams all experience fluctuations in revenue throughout the year. During the off season, when these businesses operate at lower capacity or close up shop entirely, they can easily experience negative cash flows as rent and other fixed expenses persist. If your business operates on a seasonal basis and experiences negative cash flow during the off-period, do not panic — so long as your annual cash flow is positive, a seasonal slump is nothing to worry about. 

Problematic Causes of Negative Cash Flow

While some causes of negative cash flow are nothing to worry about, there are negative cash flow causes that should raise your concern. The following scenarios would likely require intervention, assistance, or outside to overcome. 

Unsustainable Business Model

Many businesses experience mismatched revenues and expenses during the early months of operation. While occasional or one-time periods of negative cash flow brought on by misaligned balance sheets is no cause for panic, if you persistently generate less revenue than what is needed to cover expenses each month or quarter, your business can face serious financial harm. 

If your business is routinely grossing less than it spends, your business model is unsustainable and will eventually run out of cash. A solution to this problem, for many businesses, is to raise the price of products and services while cutting overhead costs such as insurance or rent. Doing so increases profit margin which can help improve your cash flow situation as long your volume does not diminish. 

Economic Downturn

External economic factors, such as an economic downturn, recession, or national emergency, can also cause negative cash flow for a business. While these circumstances are obviously not the fault of any mismanagement or missteps, they can spell trouble for your business by decreasing or halting revenue for prolonged periods of time. 

During a recession or national emergency, like that brought on by the COVID-19 pandemic, keeping your business profitable will likely require some change in business structure. Throughout the pandemic many restaurants have shifted toward takeout and delivery services to continue generating revenue with the inability to offer indoor dining. Other businesses have changed their locations, shifted to remote work, or temporarily paused their operations in order to minimize expenses as they weather the storm. There’s no blueprint for outlasting a downturn or emergency as each situation is unique and typically out of your control, but remaining agile  and being conscious of your cash flow is a great way to prepare. 

Theft or Fraud

There are a number of explanations for why a company might be experiencing negative cash flow, and a vast majority of cases fit into one of the examples listed above. However, if you’re experiencing negative cash flow, and you’ve already ruled out the other possibilities, the cause of your troubles may be internal. In rare situations, some companies experience losses due to theft or fraud by associates or vendors. While this should be an uncommon occurrence, if you believe an employee is embezzling funds or a vendor is shaving profits, you should approach a third-party law enforcement agency to investigate the issue. 

Persistent negative cash flow can disrupt a business’s operations and threaten its ability to stay solvent and achieve profitability. If your cash flow worries are temporary, however, then small business financing may be a great solution for your business. 

When businesses need cash flow stabilization, equipment, or additional capital to bridge a gap in the business or seize an opportunity, business financing enables you to pursue the initiative without suffering from consistent cash flow shortages which can compromise continuity.

Negative cash flow can impact any business for any number of reasons and certain reasons raise more concern than others. By being aware of what is causing your cash flow shortfall, possible solutions and taking care to tailor your business to present circumstances, you can greatly reduce the risk of falling into this scenario.  

 

Author Bio

Jeffrey Bumbales
Director, Marketing  & Strategic Partnerships