What is negative cash flow?

Negative cash flow happens when the expenditure on an asset is more than the cost of the asset itself. When a company or individual is spending more than they are making, it results in huge losses if it accumulates over time.

This does not always mean that negative cash flow is a bad thing. Most investors ride out this period until the asset appreciates.
However, the persistence of negative cash flow can turn business upside down.

Here’s how you can remove the risk from negative cash flow:

1. A fool-proof business model
Planning is very important for a business to succeed. Apart from the implementation of a good business plan, you need to be flexible enough to deal with the ebbs and flows that accompany an investment. This can be with reference to real estate investments, tech startup investments or any other investment that demands a cash influx.

2. Cutting costs
In the running of a business, petty and unnecessary expenditures must be eliminated. At times, the petty expenses add up to create huge cash outflows that are detrimental to the functioning of a business.
Along with cost-cutting, businesses can factor in ways to increase income by entering new market segments and expanding by acquiring more clients through well-researched tactics.

3. Utilisation of positive cash flow
When the incoming amount exceeds the outgoing amount, positive cash flow is indicated. A period of positive cash flow should not be taken for granted. It should be utilised to make investments in a manner that mitigates the onset of a negative cash flow situation. Storage of positive cash flow for a rainy day is a good business practice.
Cash reserves come in handy while handling long-term investments.

4. Managing payment terms
Payment terms set for clients or customers must be in sync with the payment terms set by suppliers or vendors to avoid a situation of negative cash flow. The best solution to achieve this would be to negotiate terms with all parties to achieve a balance in terms of payments.
Large orders or projects can necessitate a lump sum of working capital from the clients or customers. This deposit policy should be built into the sales model.

5. Realistic goals
Accepting that a business model is not working is one step towards rectifying the problem. Actions must be taken to improve the same. It is important to set realistic goals for yourself and set a deadline for turning a profit. Borrowing money should not be an option unless it is a dire situation as this leads to the business lamenting in a constant negative cash flow crisis.

A small business owner must keep in check the cash inflow and outflow of the business. Companies face profits and losses in equal measure- especially in the initial stages due to negative cash flow situations and insufficient working capital. A balance sheet is a fool-proof way to gauge the performance of all your investments. Taking into consideration the points mentioned above can facilitate the achievement of optimum cash flow levels.