How long can a firm manage to operate with a negative cash-flow?

As a small business entrepreneur, one needs to constantly keep a check on the cash coming in and going out of your business.

Not even the most successful companies operate at profit all the time. Sometimes they face loss and experience negative cash flow on purpose (which means to go cash negative to a quarter, half-year or even a year while investing in something that expects to fetch huge profits in future). So, how can you expect to be any different?

How to know if you have a negative cash flow?

A balance sheet is a foolproof way to know how well the business is doing. One can see the total revenue earned at any given point in time. Balance sheets act as a portal which displays everything black and white. When incoming money exceeds the outgoing, it results in a positive cash flow, which is a good sign. The firm is earning more than you’re spending so it’s making profits.

On a vice-versa case, a business can experience a negative cash flow. Negative cash flow occurs when a firm is spending more than it is earning which ultimately leads to the company making losses.

If the negative cash flow persists for a long time, it can turn the business upside down. A small business has to suffer in form of penalties, late fees, and bad reputation.

Now when you get stuck in the tricky situation of almost on the verge of going bankrupt, you usually ponder- Is there a finish line, and can you reach there? Now, there is no universal answer to that question but the good news is that there are more specific questions which can help to find a customized answer as a solution for the business.

What Do the Cash Flow Numbers reveal?

This may translate to an equation:

  1. How many losses are incurred by your firm each month?
  2. How much cash-reserve do you own as an entity?

Now, ask us the solution? Divide 2 by 1 and there you go. If the losses account for Rs. 50000 a month and you have Rs. 600000 in reserves, there is not much to worry at least for the near future.

How I wish cash flow management was that simple and straight-forward. There are tons of other factors one needs to consider while estimating the liquid health of the firm.

So, let’s continue asking ourselves these questions:

WHERE IS THE BONUS CASH COMING FROM?

Be it a reliable huge order expected to come in from a regular customer or a new client setup or a tax refund or a new credit line or an acquisition of investor, a business must be ready to leverage these opportunities. These options will increase the reserves and increase the survival time for the business before it can actually start swimming.

On the contrary, there are major expenses that might not make a place in your monthly calculations. Repairs, depreciation, insurance payments etc. are a few examples. Each of these result in the reduction of reserves and can make the business bankrupt.

WHAT EXPENSES CAN BE REDUCED?

There are so many petty and unnecessary expenses which add on to huge cash outflows for a business. A company should look for the chances to reduce the bottom line expenditures. Along with cutting costs, a firm must look for ways to increase income through acquiring new clients and entering new market segments.

HOW CAN YOU EXTEND THE DUES? 

What can be done to extend when some of your business expenses are due? Vendor factoring and other short-term solutions usually aren’t much use here, since the extension isn’t likely to last long enough to be helpful. Instead, look at ways to put off payment until after your “finish line date.”

Some of these opportunities aren’t as simple as asking a vendor for an extension. Taking on more business credit, getting a cash infusion from a new investor or putting more of your personal funds into the business are all other ways to extend.

An extension either cuts immediate expenses (thus reducing how much you lose monthly), or adds to your reserves, or both.

HOW RELIABLE IS YOUR PROFIT ESTIMATE?

This is the final, but perhaps the most important question. You’ve set a date by which you believe your company will turn a profit. Can you trust that date? If, for example, you have a signed contract starting in six months with a new client who can single-handedly put your company in the black…then it’s worth making many sacrifices and taking on some debt to make that number. Similarly, if your income is growing by 5% per month and you need only a 50% increase to become profitable…do whatever is necessary to still be open 10 months from now.

A business needs to incorporate the following 2 things:

  • Accept that your business model is not functional. Take actions to improve the same.
  • Work on having a more concrete and practical profile plan/finish line.

Please keep in mind that taking loans or borrowing money through any source should not be an option since your business is in a constant negative cash flow crisis. Expanding your customer base through well- researched tactics can fill in the gaps and can help the business reach to the optimum cash flow levels.

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