Is Negative Cash Flow a Bad Thing for Businesses?
While all businesses dream of running an organization that earns way more than they expend, that’s not always the case. In many stages of a business, expenses may actually outweigh incoming cash, and in such a case, this is referred to as negative cash flow.
Is a negative cash flow bad? Well, the answer isn’t as clear as it may seem.
What Actually Happens during Negative Cash Flow?
When a business has negative cash flow, it means that the money coming in from sales and investments is not enough to cover the expenses of running the operation. This can happen for various reasons, such as a sudden drop in sales or an increase in operating costs due to a new project.
Is Negative Cash Flow a Bad Thing for Businesses?
In the short term, negative cash flow can be a major problem for a business. It can lead to the company having to take out loans or dip into its savings to cover its expenses. This can be a difficult burden, as the business may not have the resources to repay the loan or replenish its savings.
On the other hand, negative cash flow can also be seen as a sign of growth. It could indicate that the business is investing in new projects or expanding its operations. In this case, the short-term losses are seen as a necessary sacrifice for long-term gain.
What Are the Common Causes of Negative Cash Flow?
Of course, the first thing that negative cash flow tells you is that you’re spending more than you’re getting. It is when you start to dig deeper to answer the why that you’ll discover the possible cause of it:
1. Poor Budgeting
The first common cause of negative cash flow is poor budgeting. Many small businesses don’t have a good system to track their income and expenses, leading to overspending and insufficient money to cover necessary expenses. To avoid poor cash flow, small businesses should create a budget that accounts for all income and expenses and then stick to it.
2. Uncollected Receivables
The second common cause of negative cash flow is uncollected receivables. This occurs when a customer fails to pay for goods or services, which can leave a business with a large number of unpaid invoices. To better manage receivables and avoid negative cash flow, businesses should implement policies to ensure customers pay on time. This could include charging late fees, offering incentives for early payment, and providing payment reminders.
3. High Overhead Costs
The third common cause of negative cash flow is high overhead costs. Many small businesses struggle to keep their overhead costs low, leading to a lack of cash flow. To avoid this, businesses should look for ways to reduce their overhead costs, such as by switching to cheaper suppliers, consolidating services, and cutting back on unnecessary expenses.
Conclusion
While negative cash flow can be either good or bad, one thing’s certain: you do not want to stick around in negative cash flow for too long. Lost money is lost money, and in the long run, it can lead to the demise of your business. So, if you are experiencing negative cash flow, it is vital to take action immediately and plan for it. Everything from streamlining your payment terms to having an emergency stash can help ensure that your business limits its negative cash flows, setting yourself up for long-term success.
Ash CPA offers trusted and reliable CPA accountants to help businesses meet their accounting and tax-related needs. If you are looking for an accountant in Framingham to help you manage cash flow, reach out to us today!