Question

If a Company continues to burn through cash and has negative cash flow, what is the Company most likely doing to support operations?

Answer 1

Negative cash flow means your business has more money going out than coming in. Money sources, like sales, cannot cover your expenses with negative cash flow.

During periods of negative cash flow, your business is not profitable. Consistently having negative cash flow is not healthy for your business.

To recover from negative cash flow, following tips are as follows :

1. Look at your financial statements : If you want to fix a problem, you need to get to the root of the issue. You can do this by creating and looking at your business’s financial statements. There are three types of financial statements: income statement, balance sheet, and cash flow statement. Looking at all three can help you understand why your business isn’t profiting, what your expenses are, and how to better manage your debts. For cash flow issues, pay close attention to the cash flow statement. A cash flow statement is a snapshot of the money flowing into and out of your business during a period. It shows you how much you are earning and spending from operations, investments, and financing. Compare cash flow statements from different periods to see how well you manage money over time. You can also use the statement to project future cash flow. By forecasting cash flow, you can accurately create a small business budget and time purchases.   

2. Modify payment terms : Negative cash flow can be due to customers not paying you. You might make a lot of sales in a period but not receive payment right away. Adjusting your payment terms can help you receive money more quickly. Payment terms let customers know their payment due dates, methods of payment you accept, and late fees. To improve negative cash flow, try shortening your current payment terms. Send reminders and collection letters. Encourage customers to pay you early by offering discounts.

3. Cut expenses : One reason for negative cash flow is that you have too many costs. Take a look at your operating and overhead expenses.

   Operating costs are the expenses related to production (e.g., materials). Overhead costs are the expenses related to running your business (e.g., rent).

   Cut costs by figuring out what your business needs. Find new ways to operate your business with fewer expenses. And, you can reduce expenses by shopping around. Talk to other vendors to see if they could give you a better deal than your current supplier.

4. Increase sales : There are different strategic pricing methods you can use to increase sales. Try offering discounts or bundling products to sell more.

   Increase your low-cost marketing efforts to let customers know about your goods or services. Use social media and email marketing to reach out to current and potential customers.

5. Work with vendors, lenders, and investors : Being strapped for cash is frustrating. If you don’t have enough cash on hand to cover your expenses, you might need to seek help.

   If your vendor sees you as dependable, you might be able to reorganize payment terms. You can break payments up into smaller sums or ask for an extension. Working with your vendor lets you better manage your business’s cash flow.

   You can also seek financing or investments. Small business loans can help you grow your business with borrowed money. If you need capital but don’t want to make loan repayments, you can seek out private investors.