Negative cash flow: Causes, solutions, and recovery strategies

Inflation

When inflation is high, as we are seeing in the US, goods cost more and businesses have higher outgoing cash as a result. And with interest rates remaining high, businesses with existing loans suddenly find themselves making higher loan payments. This means businesses may have predicted a certain cash flow, but are dealing with less available cash thanks to higher borrowing expenses.

Supply chain issues

The long-term effects of pandemic lockdowns, lack of working hands, and other factors over the past several years have created material shortages and price increases across all industries. Shortages mean higher prices and less cash on hand, making it harder to maintain and forecast cash flow.

Growing labor expenses

Labor costs continue to rise and many industries are facing staff shortages. This issue started with the pandemic but has worsened over time. 

High labor costs mean that businesses have to spend more to produce and deliver their goods or services to consumers. And labor shortages mean that businesses can’t find enough help to fill their needs, leading to shorter working hours or longer fulfillment times. This leaves less cash for the business and can contribute to negative cash flow.

Messy bookkeeping

Keeping the books in order and updated is important to make sure your business is on track with its finances. Being able to forecast cash flow will help you adjust your needs in a timely manner and avoid being surprised by low earnings and unpredictable expenses.

Inventory management issues

You need a certain level of inventory to make sales, but overstocking is also a problem. The higher your inventory levels, the less available cash you have as you’ve paid for what you have in stock but haven’t made the sale. 

Uncounted or forgotten inventory is also a burden to cash flow until it is identified and sold because it ties up your cash and damages your liquidity. That’s why keeping an accurate record of inventory is so important to your cash flow.

Operational factors

A business is like a machine. If it is not operating optimally, then this will impact cash flow. For example, a business with  high operating costs will eat up more cash in operational expenses, reducing available cash. If customers are slow to pay, then incoming cash is delayed, putting the business out of sync with accounts payable and disrupting the smooth flow of incoming and outgoing funds.

Pricing issues are also a factor. If inventory is purchased at a price that’s too high, then profit margins are  lower, reducing cash flow. If a business has to increase the cost of their products or services unexpectedly, this may lead to fewer sales, lower revenue, and subsequent cash flow problems.

Business operations

A business with negative cash flow may struggle to pay ongoing expenses, such as rent, payroll, vendor invoices, and utilities, increasing the risk that operations will be disrupted. The business may also have to cut back on inventory purchases or restrict hiring, making it harder to fulfill orders or meet customer demand.  

If a business isn’t able to maintain healthy cash flow, it may be late in paying suppliers, which can lead to less favorable payment terms or reduced credit limits. Suppliers may even choose to stop working with the business if the situation gets out of hand. 

Negative cash flow also means that the business is not in a position to take advantage of early payment discounts, which increases the cost of expenses over time.

Difficulty securing financing

Cash flow is a key indicator of a business’s health, and lenders use it to determine loan eligibility. Negative cash flow is a sign of financial instability, which makes it harder to qualify for financing and less likely to get favorable interest rates. Higher costs of borrowing, such as higher interest rates or shorter repayment terms, add even more financial strain to the business.

Plus, businesses with negative cash flow don’t have available funds to invest in marketing, product development, or hiring more staff, which hampers their ability to grow and stay competitive.

#1 Negotiate your accounts payable

Accounts payable, or AP, is the money that your business owes or needs to pay for goods and services. It includes all business expenses such as rent, utilities, equipment, supplies, and service providers.

A financially healthy business should always have enough money to pay its bills. But if you’re short on cash, you can potentially  negotiate better payment terms with your vendors. Ask them for longer payment terms, paying in installments, or creating a payment schedule that helps you hold onto cash longer. Vendors who you have a long, trusted working relationship with are more likely to accept these requests.

#2 Use online AP tools

Using a digital payment tool can benefit your cash flow in many ways. First, it can help reduce accounting errors that may result in double payments or wrong cash flow forecasting.

In addition, many vendors are still working with paper checks. But digital bill pay solutions like Melio allow you to pay by credit card, even if your vendors don’t accept them. By paying your business bills with a credit card, you can defer payments to the next billing cycle. That way, you can buy the inventory and make payments you need now, while only paying when your balance is due and you have enough cash to do so.

#3 Revisit outstanding invoices

Outstanding invoices are any invoices sent to customers that haven’t been paid yet. Regularly review your accounts receivable (AR) and if there are invoices to be collected, consider incentivizing your customers to pay them earlier. 

Sometimes, invoices haven’t been paid because your clients just forgot. Use this opportunity to send out reminders, or use an accounts receivable tool that automatically sends reminders for you. And ensure you’re making it as easy as possible for your customers to pay you by accepting digital payments and including payment links in your invoices. Less friction typically means faster payments, which boosts your cash flow.

#4 Sell equipment you don’t need

Sustainability is the word on everyone’s lips, and negative cash flow is a wonderful opportunity to turn this into practice. There are likely a lot of things that you don’t use in your office or store. Desks, chairs, computers, or anything you don’t need can be sold to earn some extra cash.

#5 Know the right federal programs

When your business is facing cash flow issues, the first thing that often comes to mind is a loan. Before you go that route, as it can solve short-term cash flow problems but worsen them in the long-term thanks to interest, make sure you consult an accountant or a financial expert. 

Either way, be sure to check what federal grant or loan programs are applicable to you. The Small Business Administration is usually a good source of information.

#6 Run a promotion

This may seem counterintuitive – after all, it usually  money to run a marketing campaign. However, while the cost of a promotion will cut into your immediate cash flow, it is a great way to increase sales and attract new customers. 

For example, offer a sale on certain items or categories, or provide a discount code on the next purchase, encouraging buyers to come back soon. By creating a promotion and advertising it online, via word of mouth, or in-store, you can succeed in generating more revenue. 

Promoting a sale via your email list or social media channels also won’t cut into your marketing budget, and can generate additional income from people who are already engaged with your brand.

#7 Ask an accountant

Managing your finances isn’t easy. For some business owners, it’s their least-favorite part of running the show. Don’t worry, that’s what financial experts are for! If you don’t have an accountant, it’s always recommended to consult one when your business is facing financial challenges like cash flow management issues. A good accountant can help you sort out the underlying causes and create a plan for the future that helps you get out of the downward spiral.