A business can run short of money at any time of the year. There are periods when you spend more than you earn, resulting in a negative cash flow. But, it’s not always a sign that you’re in trouble.
What Causes Negative Cash Flow?
Cash flow issues can happen due to unplanned expenses, a slow month, or maybe a client that paid late, forcing you to pull from your cash reserves to cover expenses.
However, if a negative cash flow is becoming a regular occurrence, you should review your processes and figure out the problem. Consulting with a financial modelling and data analytics agency can help you understand your data by providing actionable insights, allowing you to make better and more accurate decisions.
You cannot sustain a business with long-term negative cash flow—you will eventually run out of funds, which may leave you with no option but to shut down. The good news? There are ways to avoid negative cash flow and that starts with you identifying the issues.
How to Recover From Negative Cash Flow
Identify the Source
Aside from the external factors cited above, the cause of negative cash flow can also be the result of poor financial management:
– You charge too low for your products and services
– You have uncontrolled spending
– You have high operating costs
– You are overstocking
– You are expanding too fast without a well-constructed plan
– You are struggling with financial management issues
By identifying the root of the problem, you can create targeted solutions and prevent similar issues.
Update Your Payment Terms
Late payments are a widespread problem with over 1,300 businesses in Australia. In 2017, a study found that many corporations in the country paid invoices on average 26.4 days late.
Take a look at your billing procedures. How long does it take for your customers to pay? If late payments are putting a strain on your budget, consider reducing the number of days your customers have to pay to guarantee a steady inflow of cash.
Be proactive in collecting payments—send reminders when due dates approach and work with late-payers to come up with a compromise. You can also offer discounts to customers who are paying in cash. While you are giving up a small percentage of the transaction, it also means you are getting the cash faster.
Lower Operating Costs
Operating costs are the ongoing expenses incurred from the day-to-day activities of a business including, but not limited to, rent, equipment, inventory costs, payroll, marketing, insurance, and investments,
List all your operating expenses and identify which you can reduce and eliminate. Weigh the risks and rewards of every expense and how removing it will affect your business. You can also look for cheaper alternatives or shop around for better rates.
Reduce Inventory
Holding too much inventory ties up your funds that could have been used elsewhere in the business. It can affect your cash flow, particularly when the inventory is not sold immediately for a profit.
Gain better visibility into your inventory. It should help you gain better control of your stock, determine when it needs replenishing, or when it is in overabundance and needs selling. One way to sell old inventory is to sell them at a reduced price. Offer discounts to encourage customers to buy in larger quantities.
These efforts should stabilise your cash flow and ultimately increase revenue.
Apply for a Loan
Sometimes, revenue alone cannot resolve a negative cash flow. You may have to resort to applying for loans to sustain your business.
Keep in mind, however, that a loan is only good if you are experiencing negative cash flow because:
– Expanding your physical location
– Building credit for the future
– Investing in new equipment
– Hiring more employees
– Purchasing more inventory
Avoid applying for one if you’re only using it to pay for existing debt.
Takeaway
Monitoring your cash flow allows you to better understand how the money is moving in and out of your business. By analysing patterns, you’re better prepared to make adjustments, address issues, and arrive at smarter decisions to ensure business success.
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