What is negative cash flow? How does it work? How to fix it?

As your business grows, you might hit some bumps where you’re spending more than you’re making. This is what we call negative cash flow. Remember that your profit margins can fluctuate, but your cash flow is a key indicator of how well you’re doing financially. For instance, a positive cash flow is when a business or individual receives more money than they spend, resulting in excess cash.

As a business person, or a real estate investor, you cannot afford to ignore the main causes of a negative cash flow. And, if you do not manage the problem, your business could end up losing money, shrinking, or even closing down. 

Here, we’ll explore what negative cash flow is and how to manage it to stay on top of any challenges that come your way. 

What is negative cash flow?

Negative cash flow happens when your business is shelling out more money than it’s taking in. However, that doesn’t always mean you’re losing money. Sometimes, you have to pay your bills before you get paid by your clients, which can lead to a temporary cash crunch. 

We understand that there might be certain months when your expenses outweigh your earnings. And, this can make it hard to have enough cash on hand for future investments. It may even mess with your revenue and liquid assets. But if this situation goes on for long periods, you will face a cash flow crisis. 

An example of negative cash flow in the real estate industry is when a rental property owner has more expenses than income. For instance, if the monthly costs for the mortgage loan, property taxes, insurance, maintenance, and utilities total $2,500, but the rental income is only $2,000, the owner faces a $500 shortfall each month. This means the owner has to cover this $500 difference out of their own pocket until they can either increase the rent or reduce expenses.

Another example of negative cash flow is a retail store that sells holiday decorations. The store spends a lot of money to buy inventory, hire extra staff, and run marketing campaigns. However, during the off-season, sales slow down, and the store still has to cover fixed costs such as rent and salaries. This means the store is spending more money than it’s making for a period, leading to negative cash flow. 

What are some common causes of negative cash flow?

Unnecessary investments

Spending too much on non-essential products or services can drain your funds without providing significant returns. This misallocation of resources can seriously impact your cash flow.

Improper planning

Not setting long-term goals, trying to expand your business too quickly, or not hiring the right people can harm your future opportunities and brand image. While things might seem fine temporarily, poor financial planning will leave you strapped for cash during unexpected expenses. Unfortunately, this could lead to an over-reliance on loans that you may struggle to repay.

Inefficient management

Poor productivity and ineffective marketing strategies can lead to spending a lot without seeing good returns. For example, if your staff is bogged down with tasks that could be automated or if your marketing isn’t hitting the mark, you’ll face high operating costs and poor sales. These could affect your credit ratings.

Late payments

If your invoicing and payment processes are complicated, you might experience delays in getting paid. This can hurt your cash flow, making it hard to pay your vendors and cover overhead expenses on time.

Negative cash flow implications can be mitigated by optimizing financial strategies, such as implementing efficient invoicing processes that preempt delays. Utilizing tools like estimate templates allows for clear and organized project cost estimations, facilitating timely billing and receipt of payments.

Incorrect pricing

Setting the wrong prices (whether for merchandise or real estate) can mess up your cash flow. If you’re charging too little, your profit margins will be thin. On the other hand, if you overcharge, customers might look for cheaper alternatives. Finding the right balance is crucial to avoid these pitfalls.

What are the strategies to manage negative cash flow?

You need to manage your cash flow, ensuring your business or property investment remains financially healthy and can continue to grow. Here’s what you can do. 

• Keep a close watch on your finances. Review your operating expenses, financial statements, or any overdue payments every couple of weeks or months.
• Regularly run cash flow statements (showing the inflows and outflows of cash) to get a clear picture of areas where you might need to tighten control.
• Set aside a certain amount of cash each month as a reserve to prepare for unexpected expenses as a business or property owner.
• Consider taking out a business loan for quick cash. Ensure you understand the terms and interest rates, and have a repayment plan in place.
• Be mindful of your spending. Cut unnecessary expenses and focus on investments that will improve your cash flow and drive business growth.
• Look for additional sources of income, such as new products or services, to boost your cash flow.
• Simplify your payment processes to make it easier for customers to pay on time. 
• Use business credit cards with cash-back rewards for regular payments, which can provide some return on your expenditures.
• Clearly outline your payment terms and conditions, including due dates and penalties for late payments. You may offer discounts or other incentives to customers who pay early.
• For customers who prefer not to pay in cash, check their credit scores to ensure they have a reliable payment history. This helps reduce the risk of late or missed payments.
• If you decide to sell to a customer with a poor financial history, consider charging a higher interest rate.
• As a last resort, consider legal action against customers who consistently fail to pay on time. 

Last thoughts

Negative cash flow may be common for growing businesses and investment properties. But, you need to spot issues early and address them. Only then can you maintain healthy cash flow and steady growth. Focus on prioritizing resources that bring returns, planning ahead, monitoring cash flow statements, and staying on top of forecasting. We hope these tips will help you safeguard and grow your business at a steady pace.

Written by Ramona Sinha. June 29, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.