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5 Tips to Manage Negative Cash Flow

GoCardless
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Last editedNov 20223 min read

Negative cash flow can take a toll on your business’s ability to meet its financial obligations. For example, if your business earned £10,000 in revenue last month but spent £20,000 in outgoing expenses, you’d have a negative cash flow of £10,000. While ups and downs are a common part of doing business, it’s best to find ways to manage cash flow more effectively. So, what is negative cash flow, and how can you reduce it? We’ll offer five useful strategies in this guide.

Negative cash flow definition: what is negative cash flow?

The negative cash flow definition applies to any situation where a business spends more money than it makes. It’s common for new businesses to have negative cash flow because investment is required to grow. It takes time to create a fully balanced revenue stream where income and expenditures are equally matched.

However, continuous negative cash flow over time isn’t ideal. This indicates low profits, overinvestments, or costly overhead costs. It could also mean that your billing cycle is too long, leading to overdue invoices from customers. Before determining how to fix negative cash flow, you’ll have to look at your financial statements to find out what’s going wrong.

Negative cash flow example

Imagine that Company ABC has created its monthly cash flow statement. In this negative cash flow example, you can see that the business earned less in income than it paid in expenses.

Monthly Cash Flow Statement

OPERATIONS

 

Cash received from invoices

£80,000

Cash paid to suppliers

-£50,000

INVESTMENT

 

Cash paid for machinery

-£25,000

FINANCING

 

Cash paid for business loan

-£10,000

Net Decrease in Cash

-£5,000

Throughout the month, the company took in £80,000 while paying out £85,000 to various sources. As a result, its negative cash flow is £5,000.

What are the disadvantages of negative cash flow?

While it’s a common part of doing business, there are a few disadvantages of negative cash flow to be aware of. Primarily, it’s not sustainable in the long term for a business to continually spend more than it earns.

  • It damages relationships with investors if you’re unable to pay dividends on time.

  • It damages relationships with suppliers if you’re unable to pay invoices on time.

  • It damages customer relationships if you’re always chasing them for late invoices.

  • It reduces your chances for growth if you don’t have the funds for reinvestment.

  • It increases the need for budget cuts in other areas of your business.

How to fix negative cash flow

Now, let’s turn to the good news. You can often fix negative cash flow by simply implementing more efficient systems. Here are our top five tips to help you get started.

1. Create a cash flow statement.

You won’t be able to manage your finances without accurate, up-to-date financial statements. In the case of negative cash flow, this means keeping on top of your cash flow statement. You can then use this as the basis for regular cash flow forecasting, analysing revenue and operating expenses over time to keep them in balance. It’s a good idea to perform a cash flow analysis monthly to ensure you’re able to meet the following month’s obligations.

2. Review and reduce outgoing expenses.

If you’re spending more than you earn, it’s time to cut expenses. Look carefully at your overhead costs as well as operating expenses, breaking down expenses into necessary and unnecessary categories. Can you switch to more affordable suppliers? Are there discounts for purchasing supplies in bulk?

3. Find access to back-up cash.

Any time you have a surplus of cash at the end of the month, put it into a separate account. Over time, you’ll create a rainy-day fund you can use to cover costs in months with a negative cash flow. This might take some time for businesses operating on a razor thin margin. Yet even setting aside £100 per month helps when you are hit with unexpected fees or high tax bills down the road.

4. Automate y createsour accounting processes.

One of the best ways to make your business more efficient is through automation. Creating spreadsheets and managing budgets manually is time-consuming and costly. Consider switching over to automated accounting software like QuickBooks or Xero to speed up these processes. This also ensures accuracy when it comes to creating cash flow statements and other accounts.

5. Streamline your payments process.

Negative cash flow is often the result of late payments. UK small businesses are paid 18 days late on average, leading to potential issues with cash flow. Consider shortening payment terms and offering discounts for early payment. It’s also a good idea to make payment as simple as possible for your customers to encourage on-time payment.

GoCardless can help improve cash flow by putting your business in control over the timing and amount of invoice payments. Collect regular, recurring invoices with flexible Direct Debit or one-off payments with Instant Bank Pay. The process is quick and automatic to reduce any friction at checkout. quickly and automatically. GoCardless users get paid 47% faster, while reducing the cost of taking payment by 56%.

While it’s a common part of doing business, negative cash flow can impact your everyday operations. Use the tips above to turn that negative into a positive.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.

Over 70,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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Interested in automating the way you get paid? GoCardless can help

Interested in automating the way you get paid? GoCardless can help

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