Do EOFY Differently with QuickBooks
Need help choosing a plan?
Created with Sketch. 1800 917 771 Schedule a call
Need help?
We're here for you.
Schedule call
Created with Sketch.
Image Alt Text
Running a business

What negative cash flow is and how to manage it

As a small business owner, you know firsthand how many obstacles you can face on the road to success. Ups and downs are inevitable and a critical part of any business that’s serious about growth. Even if you’re meticulous about financial forecasting, things can go wrong.

Negative cash flow is among the challenges your growing small business may face. Let’s say, one month, your business earns $5,000 in revenue but spends $10,000 on outgoing expenses. That’s an example of negative cash flow.

Let’s dive into the causes and effects of negative cash flow and five tips for managing it.

What is negative cash flow?

Negative cash flow occurs when a business spends more than it makes within a given period. Although negative cash flow means there is an imbalance in the revenue stream, it doesn’t necessarily equate to loss. Often, it reveals temporarily mismatched expenditures and income.

Negative cash flow is a common financial occurrence for new businesses. Starting a small business is expensive, and it takes time and hard work to generate cash inflows that exceed investments. In essence, dealing with negative cash flow is almost unavoidable.

Is negative cash flow bad?

As mentioned before, negative cash flow means that your business is spending more money than it receives. Though negative cash flow is not inherently bad, this financial asymmetry is not sustainable or viable for your business in most cases. Ultimately, your business needs enough money to cover operating expenses. Uncontrolled or overlooked negative cash flow can render your business unprofitable.

However, the reality is that you will not make a profit every month. Even the most well-recognised and successful corporations can struggle to stay positive every month. Some corporations may lose money and promote negative cash flow to produce higher profits in the future. No matter the scale of your business, experiencing negative cash flow is normal.

What causes negative cash flow?

Several mistakes, miscalculations and financial roadblocks can cause you to spend more than you earn. Let’s take a closer look at eight of the most common causes of negative cash flow.

1. Low profits

Your business’s primary source of income is profit. You generate profit when consumers purchase your goods or services. Of course, it costs your business money to manufacture or provide goods or services. The key to making a profit is to eclipse outgoing costs with incoming revenue. When you can’t do that, you experience negative cash flow.

There may be many reasons why your small business may be struggling to keep your balance sheet positive. Those reasons can include:

  • Ineffective sales and marketing strategies
  • Low  productivity among your staff
  • Undercharging for your services or products
  • Expensive operating costs
  • Uncontrolled spending or cash outflow.

If your business’s profits are too low—or you’re altogether unprofitable—you may find it difficult to source the money to cover all your essential outgoing costs. Typically, this shortfall results in the need to borrow money to keep operations afloat.

2. Overinvesting

One of the most common downfalls for businesses of any size or age is overinvesting. You overinvest when you spend an excessive amount of cash on non-business-critical services, projects or products. Ultimately, these payments only drain funds rather than boost profitability. Overinvestments act against the best interests of your company and shareholders and can quickly result in negative cash flow.

3. Expedited growth

As a small business owner, you should want to grow your enterprise. However, if you don’t create strategic, detailed plans for growth, you could upset your efforts. Without a detailed business growth strategy, expanding too quickly could put your business in the red and leave you struggling with a cash flow deficit.

Additionally, several other growth issues can impact your small business’s financial health. These issues include:

  • Mismanaged or uncoordinated financial tracking
  • Ineffective and unorganised business operations
  • Haphazard hiring practices
  • Losing sight of big-picture goals.

4. Unexpected financial expenses

Any money you have to spend on unexpected expenses can throw off your projected cash flow. These unexpected costs are outflows of cash you didn’t forecast in your monthly or quarterly financial plan. Some of the most common unexpected expenses include insurance premiums, equipment maintenance, tax and shrinkage. If you don’t allocate funds to sudden charges, you may find yourself dealing with negative cash flow.

5. Expensive overhead costs

Overhead costs account for all ongoing expenses that are not directly related to production or sales. Essentially, overhead costs are those that your business needs to stay in business—regardless of your business’s profitability or success. Each of these overhead costs is critical for keeping your business open. But if the sum of overhead expenses is too great, you may cripple your cash flow.

Common business overhead costs include: rent, utilities, legal fees, phone and internet, advertising fees, labour costs and insurance.

6. Past-due customer payments

Late payments can lead to a damaging cycle of negative operating cash flow, according to a 2019 QuickBooks report. In Australia, a survey revealed that 1 in 2 respondents reported more than 40% of their receivables were overdue. Based on a Xero survey, 53% of invoices are late payments to small businesses from large businesses.

Without setting and enforcing detailed payment terms, small business owners may find themselves scrambling to collect unpaid invoices. Without those payments, they may not have enough cash to keep their businesses afloat.

7. Over- or under-pricing products

The price of your goods and services can influence your cash flow and net profit greatly. If you’re not charging enough or charging too much, any imbalance can lead to low profit margins.

As you determine your ideal market prices, you’ll face two truths: if your prices are too high, consumers may not buy your products. If your prices are too low, you may not generate the profit you need to keep your business alive and thriving.

8. Poor financial planning

If you don’t regularly assess your cash flow statements, strategise a cash flow forecast or set a realistic budget, your business may experience cash shortages. Financial planning is a critical facet of any business that has its sights on growth. Without the proper game plan, your finances can go off kilter and result in negative cash flow.

Grow Your Business with QuickBooks

Effects of negative cash flow

As a business owner, cash flow management should be as critical and profound as revenue and profit supervision. Several negative consequences come along with negative cash flow. If you don’t take them seriously or mediate them, negative cash flow can threaten and jeopardise your business’s success and sustainability.

Among these many ramifications, stunted business growth, stymied dividends and promotional deficiencies set your company back the most.

Stunted growth

If your small business spends more time managing negative cash flow, it can’t fully shift its focus back to growth and bigger challenges. Even if you can cover your overhead costs, insufficient cash inflows pose an inevitable roadblock in your company’s progress. With a smaller budget, achieving growth goals can become insurmountable. Stunted business growth can also lead to diminished employee morale and a tarnished company reputation.

Stymied dividends

Without positive cash flow, your business may struggle to pay dividends to owners. Anyone who has invested in your company may not collect a return on their investment, damaging your relationship with them. Limited dividends in exchange for growth and further investment is tolerable. But investors may take issue with a company that struggles due to poor cash flow management.

Promotional deficiencies

It’s common for small businesses to cut their marketing budgets to reduce their overall operating expenses. But reducing marketing efforts can lead to more advertising sales and discounts that can tarnish customer perception of your brand and business viability.

If concessions on your products or services become constant, consumers may expect those lower prices. Or worse, they may lose interest when you get your business back to positive. This shift in expectations can have negative long-term effects on your revenue potential.

Five tips to manage negative cash flow

Finally, the golden question: How can you manage negative cash flow? Use these five tips to get your cash flow back into the green.

1. Be mindful of your spending and investing

Before splurging on new equipment, software or employees, weigh your business’s needs and review your financial statements. Upon review, make key changes to your spending and investing activities. One of the easiest ways to determine your wants from your needs is by creating a list that separates “must-haves” from “would-likes”.

When you’re dealing with negative cash flow, spending money on would-likes works against your business’s best interest. It’s more important to spend working capital on software, projects or equipment that can keep your business open and whip your cash flow into shape.

2. Create a cash flow statement and forecast regularly

Cash flow measures all expenses that go in and out of your business within a specified period.

Matched fluctuation in revenue and operating expenses mark healthy cash flow. The only way to achieve healthy cash flow is by implementing and regularly operating with a cash flow forecast.

To create better projections, examine your current cash flow by creating a cash flow statement (or statement of cash flows).

A cash flow statement shows how shifts in balance sheet accounts and income impact cash and cash equivalents. The Australian Government recommends a review of cash flow every month. This analysis can help ensure your small business has enough incoming cash to handle the next month’s obligations.

Cash flow forecasts are similar to ordinary business budget plans. Forecasts should narrowly estimate all business income and operating expenses on a monthly or quarterly basis.

When done effectively, your cash flow forecast should help give you a better picture of your working capital and expectations. Forecasting can also help you determine future finance activities and examine which expenses you can afford.

3. Review outgoing expenses regularly

If you don’t actively monitor outgoing expenses, you may find it difficult to gain full business spending insights. When you review your outgoing costs proactively, you can maintain a stronger grasp on your finances and prevent future financial issues.

To begin this review process, record all overhead costs. Assess the costs that are absolutely necessary and determine which you could swap for a more affordable alternative. Do the same with operating expenses.

Run through this process every month or every quarter to ensure you’re on top of your business’s financial health.

4. Reduce expenses

Many businesses struggle with negative cash flow due to an overabundance of operating expenses. After reviewing outgoing expenses, assess where you may be able to eliminate unnecessary overhead and operating expenses.

Of course, there are many regular operating activities that are essential to your business’s survival, so it’s important to be intentional when cutting costs. Cutting costs can efficiently liberate your business from negative cash flow, but cutting costs haphazardly can lead to further injury.

Explore new ways to run your business with fewer expenses by creating cash flow forecasts that account for any financial shifts.

5. Create an emergency budget to accommodate unexpected expenses

Unexpected operating expenses can overturn your finances instantly. That’s why it’s so important to reserve enough cash to cover any sudden costs. If you’re already working with a slim budget, consider cutting down on unnecessary outflows of cash that you could allocate to an emergency budget.

For example, if you have a monthly software subscription that you no longer use, cancel it. If you have an expensive utility bill, consider more economical energy alternatives. The idea is to eliminate anything that isn’t necessary for your business success so that you can reserve more money for emergencies.

Negative cash flow is a common facet of business growth and development, no matter your company’s size or scale. So long as you’re quick to recognise and remedy your cash flow imbalance, negative cash flow is nothing to worry about. Follow this guide to stay on the pathway towards success.

Related Articles

Looking for something else?

Get QuickBooks

Smart features made for your business. We've got you covered.

Help Me Choose

Use our product selector to find the best accounting software for you.

QuickBooks Support

Get help with QuickBooks. Find articles, video tutorials, and more.

Stay up-to-date with the latest small business insights and trends!

Sign up for our quarterly newsletter and receive educational and interesting content straight to your inbox.

Want more? Visit our tools and templates!

By signing up you are agreeing to our terms and privacy policy.

A happy small business owner signing up for the QuickBooks newsletter on laptop