What is Cash Flow?
Cash flow is the sum total of all the money moving in and out of a business. Cash flow can be broken down into two main categories, positive and negative. Positive cash flow includes income from sales and money earned from investments.
What is Negative Cash Flow?
Negative cash flow refers to a situation in which more money is flowing out of your business than flowing in. While every business is naturally aiming for profitability and a positive cash flow, a negative cash flow is not always a bad sign.
Common Causes of Negative Cash Flow
- Seasonal Shifts. Some businesses have strong seasonal spikes, such as the holidays or summer. Sales may slow down significantly during other times.
- External Events. Economic downturns and other unexpected events may cause short or long-term cash flow issues. A shortage or price surge of a necessary product or ingredient may reduce your profits. Rising fuel and energy costs or rent for your office or warehouse can also impact cash flow.
- Building or Expanding a Business. It’s common for startups and newer businesses to experience negative cash flow while they are growing. If your business opens another location or expands into new markets, it’s normal for more cash to be flowing out than in.
- Lack of Proper Planning. In some cases, a business may miscalculate its expenses or expected revenue. They may price items too low relative to the cost of production. These and other planning errors can result in negative cash flow.
- Late Invoice Payments. If your business depends on customers paying by invoice, later payments (or customers not paying at all) can be a common cause of negative cash flow. Businesses must meet payroll and other expenses on a regular schedule. If your customers take months to pay their invoices, the inflow of cash is unpredictable.
Potential Consequences of Negative Cash Flow
While negative cash flow, especially in new or expanding businesses, can be a phase that naturally passes, it can also lead to undesirable effects, such as the following.
- Cutting staff.
- Lowering standards, such as buying cheaper parts, equipment, ingredients, etc.
- Stagnant growth.
- Closing the business or bankruptcy if the situation can’t be turned around.
Financing Options to Overcome Negative Cash Flow
There are many ways to turn negative cash flow into positive. They generally involve addressing the causes. For example, you may need to plan better for seasonal shifts in business or rethink your pricing. If you’re suffering from long-term or recurring issues in this area, you may want to consider certain creative financing options.
- Lines of Credit – You may be eligible for either secured or unsecured lines of credit. These are usually issued for a specific business purpose. Financial institutions have certain stipulations for lines of credit, such as having a certain credit score, minimum annual revenue, and at least a year in business.
- Merchant Cash Advances – These are a type of business loan based on future revenue. Compared to traditional bank loans, merchant cash advances are usually quick and simple to apply for. However, MCAs can have a negative impact on cash flow down the line. Learn more about the negative impacts of Merchant Cash Advances here.
- A/R Financing – Accounts receivable or A/R financing works similarly to invoice factoring. With A/R financing, accounts receivable are used as collateral for loans.
- Invoice Factoring –This is a solution to cash flow problems caused by open accounts receivable. Your business customers require extended payment terms, but you need the cash now to cover expenses. You can collect payment at time of invoicing, and your customers then pay the factoring company with invoice factoring.
Riviera Finance Offers Creative and Flexible Financing Solutions
If your business wants to boost its cash flow, consider Riviera Finance for invoice factoring and other financial services. We’ve been in business for more than 50 years and provide financing solutions to businesses in many industries. Contact us for more information.
Other Articles You Might Be Interested In:
- 15 Ways to Improve Your Business Cash Flow
- 4 Quick Ways to Increase Cash Flow
- Developing a Cash Flow Analysis
- How Much Does Factoring Cost?
- How Invoice Factoring Works – In 6 Easy Steps