What is Negative Cash Flow?

What is negative cash flow?

Negative cash flow is when more money is flowing out of a business than into the business during a specific period. Positive cash flow is simply the opposite — more money is flowing in than flowing out.

While the concept is straightforward, tracking the movement of money through a business can get complicated. If you have a small business accounting system in place, you can quickly generate a cash flow statement. Along with your balance sheet and profit and loss statement, these make up the main three financial statements for a business.

What is an example of negative cash flow?

Periods of negative cash flow are common and sometimes expected. As the saying goes, you have to spend money to make money.

For instance, a brand-new business might not make enough money to support itself at the start. Therefore, many entrepreneurs need business funding to start and grow their companies. Famously, some tech startups even can go years before making a profit.

It’s not as realistic for small businesses to last years without turning a profit. But hopefully the initial investments will pay off, and the company will become profitable. Seasonal businesses also commonly have predictable periods of negative cash flow. A well-known beach town restaurant might make most of its profits during the summer months. Once the busy season wraps up, the restaurant might have much lower labor and supply costs. However, it still may need to take out a business loan or dip into savings to cover the rest of its operating costs during the off-season.

How does negative cash flow affect a business?

Negative cash flow can make running a business more difficult in the short term. The pressure to cut corners can build if you’re watching your business bank account slowly dwindle — this can have long-term negative consequences on your finances.

For example, you might not be able to invest in quality equipment, resulting in spending more money to replace or repair the equipment later. Or you might decide to wait to hire more staff or launch a marketing campaign, which might perpetuate the problem if you then run into staffing shortages or struggle to increase sales.

If you continue to lose money, you may have to lay off employees, forgo your own paychecks, fall behind on payments to vendors and creditors — or even shut down.

Is it OK to have negative cash flow?

Operating with negative cash flow isn’t necessarily a bad thing. Even giant, international and world-famous corporations operate at a loss for some months or years. Sometimes, they even lose money and experience negative cash flow on purpose to invest in something that will produce massive profits in the future.

Here are a few situations that can cause a company to experience negative cash flow, even though the company isn’t necessarily in a bad place:

• Purchasing large business
• Spending money to open a new
• Creating a new product line or service
• Launching a marketing
• Ramping up for a busy season

In these cases, the companies are following a plan that requires an initial investment. If they’re measuring their cash flow over a given month or quarter, they might record negative cash flow for that period. But it’s a strategic decision to invest in the business.

In contrast, negative cash flow can become an issue when you don’t have a plan or strategy. If you’re unexpectedly in the red due to declining sales, unpaid invoices or increased expenses, you’ll need to figure out how to improve cash flow

How long can you operate with negative cash flow?

You can operate with negative cash flow so long as you have cash reserves or access to small business funding to continue operations. Startups, which commonly operate at a loss initially, often track their cashflow runway, meaning how long they can last with negative cash flow until they run out of money. They also track their burn rate, which is how quickly they’re losing money.

To find these for your own business, you can:

• Figure out how much cash you have on
• Calculate how much money you’re losing each month (your burn rate).
• Divide your cash by your burn

For example, if you’re burning $5,000 a month and have $60,000 in reserves, your runway is about 12 months.

However, your burn rate and runway aren’t set in stone. If you’re worried about running out of money, you may be able to extend your runway or completely switch things around and have positive cash flow by increasing your income or lowering your expenses. Source