What Causes Negative Cash Flow and How to Avoid It

What Causes Negative Cash Flow and How to Avoid It

A negative balance is a situation that you are bound to face. This much is

A negative balance is a situation that you are bound to face. This much is true in the early stages of your business. Here, you spend more money than what you generate to fuel growth, fund your marketing campaigns, and cover overhead expenses.

While inevitable, strategies to lower the occurrence of negative cash flow should be in order. You can’t sustain a business with long-term negative cash flow—eventually, you will run out of funds if you don’t make enough profit to cover your expenses.

Seeking the help of a financial modelling and data analytics company is a great step towards understanding how you can deal with negative cash flow and arrive at a smart business decision. However, it also pays to know what causes a negative cash flow in the first place and learn how to avoid it.

What Causes Negative Cash Flow?

Low Profits

You generate profit when customers pay for your goods and services. But, if it does not exceed outgoing costs, then you suffer from negative cash flow. There are some possible reasons why you’re struggling to keep a positive balance sheet:

• Poor marketing strategies

• Low productivity

• Low pricing

• Expensive overhead costs

• Uncontrolled cash outflow

• Unexpected financial expenses

Overinvesting

There are at least two ways you could be overspending: you spend too much money on non-critical items or stocking too much of your raw materials. Either way, it can cost you a significant amount of money and unnecessarily occupy costly warehouse space. Instead of boosting your profitability, this mistake can ultimately drain your funds.

Aggressive Expansion

Business expansion is a positive sign of growth. But, without a concrete plan or sufficient money to cover your initial expenses, it can put you on a financial strain. Not only that, but along with the expedited expansion comes the associated risks such as poor hiring decisions, uncoordinated financial tracking, and ineffective business management.

Late Customer Payments

Late payments can result in a damaging cycle of negative cash flow. A 2017 study shows that many large businesses in Australia paid invoices on average 26.4 days late—the worst in the world. While this may not affect Australian corporations, it can affect small businesses’ ability to cover their expenses, forcing them to use credit cards to offset late payments.

Poor Financial Management

Your failure to assess and forecast cash flow, inability to set a realistic budget, and lack of control over expenses indicate poor financial planning. It can result in a negative balance and at worse, the bankruptcy of your business. Whether you keep track of your spending or outsource it to a data analytics company, what matters is that you spend enough time to oversee your financial statements.

There are also quite a few steps you can take to offset the effects of negative cash flow.

How to Avoid Negative Cash Flow

• Manage your spending. Know what you’re spending and when and where you’re spending it. Categorise your expenses into administrative costs, research and development, sales and marketing, operations, and see where you can cut down on costs. Also, analyse whether the distribution of funds makes sense.

• Account for inflation. In forecasting your cash flow, you must include inflation to cover the projected increase in the costs of goods. This should help you secure enough resources to finance your day-to-day operations and working capital to cover the cash outflow.

• Forecast, forecast, forecast. Set up your balance sheets, cash flow statements, and cash flow forecasts. This data provides you with the necessary information to help you arrive at an informed decision and achieve growth in an efficient yet sustainable way.

The good news? There are advanced data analytics companies that provide templates that you can use as a reference. If you would like to discuss strategies to ensure sustainable growth, you can schedule a financial consultation with the experts at Forecast Global.

Visit their website to learn more.