Cash flow is like the heartbeat of your company. it helps maintain the lifeblood of your company. It should also be maintained for a financially sound body.
In theory, Cash flow is the money flowing into and out of your business in real time. Businesses often use cash flow management software to track their income and expenses.
Persistent negative cash flow can hinder financial relationships with investors, suppliers, employees and customers. Read on to learn more about negative cash flow and managing it.
What is negative cash flow?
Negative cash flow is when a business has more cash outflows than cash inflows. In other words, when a business spends more than it earns in a given period.
A negative cash flow does not always mean that the business is not doing well. In fact, it’s quite common for new companies. It can also mean that the organization expands and implements more growth solutions. However, it is the persistent negative cash flow that is cause for concern.
An example of negative cash flow
Let’s say ABC Company is a health supplement manufacturer that has recently started doing business. Let’s look at its cash flow statement to better understand negative cash flow.
Cash flow = cash inflows – cash outflows
A hit to the cash flow statement comes from negative investing cash flows and negative financing cash flows. Investing activities represent the sale and purchase of assets, while financing activities represent the payment of debt, business liabilities, and equity.
However, on a deeper dive, we see that the company is doing well in its core profit-generating operations with positive cash flow from operating activities (receivables – accounts payable). Another thing to note is that ABC has spent quite a bit on new machines, which suggests that they plan to increase production and expand in the near future.
Causes of negative cash flow
Several factors such as miscalculations, unnecessary investments and mismanagement of resources lead to disruption of cash flow. Some common causes of negative cash flow are:
- Poor financial planning
- Higher operating costs and lower sales revenue
- Outstanding receivables
- Unfavorable product pricing
- Unexpected or increased costs
- Unmanaged resources
Tips for managing negative cash flow
As mentioned earlier, if your company is struggling with cash flow, you may have too many expenses, not enough products, or wasting money somewhere within your operations.
You can prevent bigger financial problems by paying attention to your cash flow frequently and trying some of these tips to prevent your cash flow statements from turning red.
- A penny saved is a penny earned. When building a business, it is very important to pay attention to your investments and operating expenses. Sort your investments into must-haves and nice-to-haves, and then make an informed decision.
- Save for a rainy day. Unexpected expenses are one of the many causes of negative cash flow. To avoid unexpected bills, set aside an emergency budget and cut unnecessary business expenses, such as unused software subscriptions.
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- A frequent prediction. You should frequently forecast future cash flows to create better plans and keep your financial health in check. To do this, update your cash flow statement and check for any irregularities or fluctuations in income and expenses.
- Review, reduce and recover costs. Review your outgoing spending every few months to see if you’re spending more than you need to. Eliminate any avoidable overhead or operating fees. It may also be worth looking into affordable alternatives.
How to cover a salary with negative cash flow
Maintaining a healthy cash flow is not the easiest thing to do. Clients don’t always pay invoices on time, surprise expenses often pop up, and seasonal cycles make it difficult to always have money ready to pay your staff.
However, you need to figure out how to pay your staff on time.
Fortunately, there are business loans there to help you cover payroll when cash flow is low. Many lenders offer a variety of products that make it easy to cover cash gaps, so you can ensure your team gets paid.
Some loans focus directly on helping you make paychecks, while others help stabilize your cash flow. But no matter which loan is right for you, each can help you cover payroll in lean times and keep your business afloat.
1. Short-term loans
The best: Those who only need a one-time solution.
A short term loan is the fastest way to get the cash you need. Lenders usually approve applicants within hours, and you can usually have the cash in hand the same day. The convenience of short-term loans makes them unique to help with emergencies or cover large expenses when nothing else will.
Short term loans are especially useful if you are in a one-time cash flow crisis rather than a recurring situation.
A word of warning, though. short term loans are expensive and you need to pay them back quickly. Most require repayment in less than a year. More often than not, the timeframes are even shorter. You may even have to make daily repayments depending on what your lender offers you. And if you do, that means you could end up right back where you started with cash flow problems.
2. Business line of credit
The best: Established businesses.
Even the best bookkeeping can’t always prepare you for months or unexpected expenses. Short-term loans are often expensive and come with strict repayment schedules. If your cash flow isn’t too hot, you also likely won’t be able to make these loans work in your favor.
This is where a business line of credit comes in handy. A business line of credit provides companies with a pool of funds from which they can draw as needed. You only pay interest on the amount you withdraw, which means you don’t have to pay interest on funds you don’t need. You are also not restricted to certain uses of the money you borrow. This means you can dip into your line of credit to cover payroll just as easily as you can stock up on inventory.
A business line of credit is great for established companies with good credit. Newer companies or companies without good credit may have a hard time getting approved due to the nature of how these products work. A lender is taking a significant risk when they assume that you will be able to pay back the money you borrow on a recurring basis, which can make it difficult to obtain a business line of credit.
3. Funding of Accounts
The best: Companies with irregular cash flows.
Invoice financing can be an easier option for most small business owners than approving a business line of credit. You don’t need to have exemplary credit or a long credit history to get one. You only need existing unpaid invoices.
This option does not have the same requirements as a regular loan. Lenders will give you an advance on a percentage of your total invoice amount, which usually around 85%. Your lender then keeps the remaining 15% and charges you a fee based on a percentage of the funds you receive before the invoices are paid. At that point, you’ll get the remaining 15% back.
Invoice financing is a great, fast way to put your outstanding invoices to work for you. This can help you normalize your cash flow if customers pay irregularly or if you’re in an unexpected bind. Note that invoice financing will not be cheap; you can expect to pay an 8-30% factoring fee, making them less cost-effective than a business line of credit (but more affordable and appropriate).
All that money talk
Dealing with payroll and cash flow issues is never pretty and always stressful for a small business owner. No matter why or how you’ve faced the challenge of getting enough money in the coffers to pay your employees, there are ways to get by. Best of all, some of these options can also set you up for more sustainable cash management in the future.
Ready to learn more about payroll management? Learn how payroll software can assist finance teams with their invoicing needs.
This article was originally published in 2018. Content has been updated with new information.