6 Ways to Fix a Negative Cash Flow

Sometimes it feels like cash is always going out and never coming in. Even if sales are high, it can seem like the company's cash position is dwindling. Keeping an eye on the cash flow is one of the most important things you can do as a small business owner, but it's also something that many people take for granted. This blog post will explore some common causes for negative cash flow and offer tips on how to fix them so you don't have to worry about running out!

What is a negative cash flow?

Simply put, a negative cash flow is when the amount of cash leaving your business is higher than the amount of cash coming in. A positive cash flow (surprise surprise) is the opposite.

This does not necessarily mean that the business isn't making a profit, there are many possible causes for a negative cash flow. For example, paying suppliers quicker than your customers pay you.

An ongoing negative cash flow can have dire consequences for a business, and it is important to understand why this may be happening.

What makes a company burn cash?

A company's cash burn rate is a measure of how quickly it's spending money. A high cash burn rate can be the sign of a failing business, where expenses are outpacing revenue.

What causes this?

Some common reasons for an excessive cash burn include overspending on unnecessary and non-essential items (e.g., buying expensive equipment that is not needed in the near future, overstocking, etc.). Timing purchases for when you need to make them so that your cash isn't tied up in stock or supplies can help your cash burn rate.

It can also be a sign that the revenue being created isn't high enough. This can be harder to identify and fix, especially for small businesses and start-ups that are used to operating at a loss.

How can I fix a negative cash flow?

Review your budget and cash flow statement

Your first step has to be understanding exactly where your business is at, warts and all. Invest time in getting these figures up to date and accurate, first, so you can truly see the full picture. Reviewing your budget and cash flow statement can help you to work out what is going on.

What do I need to know about the numbers?

Understanding how much money is coming in, when it's due, and where it needs to go. Are there any red flags that are causing a negative cash flow situation?

The key things to look for are your cash burn rate, cash balance, your cash flow (how much money is coming in and going out), your forecasted date for when you will run out of cash - this is your cash runway.

If your cash runway is short, you may need to find ways of making money quickly and reducing expenses.

If your cash runway is long but the cash balance has a negative sign in front of it, this will cause problems with funding operations. The best way to fix this is by raising more capital or reducing expenses. You can also consider financing activities such as borrowing from investors and lenders if they are available.

How much money are you owed?

Are you billing your clients properly? Are they paying on time? Review your Accounts Receivable to get a clear picture of your debtors.

This is one of the biggest killers of profitable businesses because it doesn't matter how much you sell or how effective your operating activities are if you're not getting paid for it.

Do you have an appropriate credit limit? Do your debtors pay on time or are they always late with their payments? A good rule of thumb is that there should be a balance of at least 30 days' worth of cash in your accounts receivable.

Can you buy some time with accounts payable?

Look at the money that you owe to suppliers and your cash flows and identify the most pressing upcoming payments. Some suppliers will be happy to negotiate longer payment terms.

Knowing exactly how much you owe and to whom will allow you to prioritize who you contact first to re-evaluate your agreed terms. This will allow you to time payments for when your business has a better cash position.

This isn't a long-term fix and won't fix an overall cash burn but it can prevent a short-term negative cash flow which can be the difference between your business surviving or not.

Assess your overheads

Now is the time to take a look at your operating activities and see where you can make some savings. Rent, advertising, contractors, all of your expenses. Review them one by one and start cutting any that aren't necessary for your business. This is one of the quickest ways to turn around a negative cash flow and turn the sprinklers on that burn rate.

What's your monthly rent? Chances are that you could find a smaller, cheaper space in the same area. You'll save money on utilities and other expenses from not having to maintain such a large property anymore as well. Make sure to look at your monthly subscriptions too, these may seem small but can easily add up to a negative cash flow if ignored.

Analyse your assets

Assets such as buildings, machinery, vehicles, or equipment should work to generate revenue for your business. If you identify any that are unproductive, effectively ‘in storage’, then now is the time to put them to work.

In the case of machinery, for example, consider how you might be able to rent it out or lease it. Alternatively, you might have to sell these assets and then lease them yourself as and when they're needed for your business.

Generating cash from assets is a short-term fix, but it can help to get you back on track for the next few months at least.

Review services and products to improve cash flow

Do your prices need to be adjusted? Are there other services or products you could offer to reduce the cash flow pressure on your business?

Consider raising prices of goods/services by assessing demand for those items, you may not have reviewed these since supplier costs changed/

Analyze if adding an additional product would be profitable

Can you think of offers or ways to re-structure your services to bring in more cash, faster? If you offer monthly billing to your customers perhaps you could incentivize them to purchase 12 months upfront and receive a discount for the annual commitment.