Negative cash flow: What it is + 8 tips to manage it

Why businesses should prioritize managing negative cash flow

Failing to turn negative cash flow around quickly can impact every part of your business. A lack of surplus cash means you can’t invest in growing your company by buying better equipment, expanding your product range, or pursuing new market opportunities.

Other potential risks include:

• Poor credit score: Lenders and investors want to see well-managed cash flow when deciding whether to back you. Low cash balances, late supplier payments, and high borrowing levels damage your credit profile and make it difficult to access external support.
• Cycles of debt: Many companies experiencing negative cash flow plug funding gaps with commercial finance. But if they don’t return to positive cash flow, the debt starts to become unserviceable, putting the business's future at risk.
• Damaged relationships: Chronic late payments strain your relationships with suppliers, resulting in stricter payment terms, account freezes, and, worst-case scenarios, a refusal of service. The knock-on effects include disrupted delivery timetables and damaging your relationships with customers.
• Personal toll: Running a business with a declining bank balance is personally exhausting. When you spend every day fighting fires, it becomes impossible to plan for the long term.

8 tips to manage negative cash flow

Finally, the golden question: How can you manage negative cash flow successfully? Use these eight tips to get your cash flow back on track:

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.

To do this, you could create a profit and loss statement for the last 90 days and highlight every expense that isn’t vital to delivering your product or service. You can then create a plan to reduce that total by 15%.

To avoid returning to negative cash flow, work with your account to build a small business budget template that maps out your incomings and outgoings so you can spot shortfalls before they happen again. 

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 indicates that your business has healthy free cash flow. The only way to achieve healthy cash flow is by implementing and regularly operating with a cash flow projection, sometimes called 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 (or statement of cash flows) shows how shifts in balance sheet accounts and income impact cash and cash equivalents. The Small Business Administration (SBA) recommends performing a cash flow analysis monthly. 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 financing 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 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.

To get started, choose a key operational process in the business, like order fulfilment or inventory management. Map out each step in that process and find ways to reduce associated costs, like labour and materials. You can then aim to find 10% in savings without impacting performance.

5. Build an emergency fund

Unexpected operating expenses can upturn 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 a cash reserve.

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.

Consider setting up a savings account or separate checking account into which you automatically transfer an amount each month for emergencies. That could be a set amount or a percentage of revenue. As the owner, treat this fund as untouchable unless you need it for unexpected and unavoidable expenses.

6. Optimize accounts receivable management

One of the first steps in improving cash flow is quickly and consistently collecting what clients owe.

Effective ways to do this include: