As a small business owner, you constantly monitor the money coming into and going out of your company. Sometimes, there are periods where you earn less than you spend, resulting in a negative cash flow. Take steps to reverse a negative cash flow to get your business's finances on track again.
When do you have negative cash flow?
In business, it’s nice to have a snapshot of how well you’re doing. In one document, like a balance sheet, you can see how much revenue you have at a particular moment. Did you make money or lose money? The answer is there in black and white.
But, limitations come with this picture because situations frequently change in business. Money continuously filters through your company.
To see when funds come in and out of your business, you need to manage cash flow. Cash flow shows the timing of incoming revenue and outgoing payments. It is a reflection of liquidity, or your ability to convert the goods or services you sell into cash.
Sometimes, you have more incoming than outgoing money. This means your business has positive cash flow, which is good. You’re earning more than you’re paying, so you are making a profit.
On the other hand, your business could experience a negative cash flow. Negative cash flow occurs when you have more outgoing than incoming funds. In other words, you’re making less money than you’re spending.
Long-term negative cash flow can do serious damage. A small business could experience late fees, penalties, and a ruined reputation. If you have negative cash flow, you should take steps to recover.
Tips for recovering from a negative cash flow
The faster you deal with cash flow issues, the better. Try these five tips to recover from negative cash flow.
1. Determine the source
Before you move forward, reflect on what caused the issue. By knowing the source of the problem, you can create targeted solutions. And, you can prevent issues in the future.
Often, the cause of a negative cash flow lies in your operations when you do not make enough or spend too much. Look for operational cash flow issues by comparing accounts receivable to accounts payable. Fewer receivables than payables can cause negative cash flow.
2.Change your payment terms
Your payment terms influence cash flow. If you invoice customers and have a negative cash flow, it’s time to revisit the payment terms on your invoice.
Take a look at your billing procedures to see how long it usually takes customers to pay. Do you wait months after making a sale to receive payment? If so, consider reducing the number of days customers have to pay.
For example, if you currently give customers 30 days to pay, cut the time back to 20 days. The shorter the timeframe a customer has, the faster you get paid. This encourages a steady inflow of cash and strengthens cash flow.
Take a look at how aggressive you are with collections. Don’t break down doors, but do be proactive in collecting payments. Send reminders when due dates approach and collection letters when due dates pass. Getting late paying clients to pay faster can help to prevent negative cash flow.
As a small business, you have the advantage of getting to know your customers. Work with late-payers and come up with a compromise. Always be professional.
3. Reduce operating costs
Put a dent in your cash flow resolution efforts by controlling costs in your small business. List every operating cost to select which expenses to get rid of. Weigh the risks and rewards of each expense and how eliminating it will affect your business.
You might be able to find cheaper solutions for some of your business expenses. Shop around and talk to different vendors in your area to see if there are better deals available. Or, change the way you complete tasks, so you get them done more cost-effectively.
4. Run a promotion
To stabilize your business's cash flow, increase revenue by holding a promotion. Advertise the sale to your social media connections, email lists, and customers.
Discounts encourage customers to buy in larger quantities. Sell old inventory that is taking up space at a reduced price. You could also sell equipment you no longer use to help recover from negative cash flow issues.
5. Meet lenders and investors
Sometimes, revenue alone cannot solve a negative cash flow. You might need to pursue investments or financing. A great place to start is the Small Business Administration. SBA loan programs help small businesses get bank loans by guaranteeing a large part of the loan.
There are also private investment funds available to small business owners. Venture capital, angel investing, and crowdfunding are all options to think about. Find private investors and do extensive research before choosing which one fits best with your business.
Amanda Cameron is a content writer for Patriot Software, a provider of SaaS accounting payroll software. At Patriot, she explains difficult small business payroll, accounting, and recruiting solutions.