Managing a business is challenging. You have to juggle your time between manufacturing and marketing while ensuring that your tax returns are in proper order. To top it all off, you must ensure that you have enough cash to continue operations.
We often dismiss financial statements as a nuisance that does not have any bearing on our operations. However, a seasoned accountant will respectfully disagree with your belief because the Statement of Cash Flows will affect your daily operations.
In this two-part blog, we will tackle the problem of having a negative cash flow and, most importantly, how to deal with such an issue. Let us begin.
What Is Negative Cash Flow?
The term negative cash flow is used when cash outflow is higher than the cash inflow. It can be caused by numerous factors such as a high manufacturing cost or a high amount of sales. Whatever the cause, a negative cash flow can make or break your business.
What Causes Negative Cash Flow?
Negative cash flow is a common problem among manufacturers, especially those who do not have the resources and experience to deal with it. However, it can happen to any business.
Your accountant will warn you if you are about to hit the dangerous level of a negative cash flow. However, it is prudent to learn what causes a negative cash flow to prevent such an issue from happening in the first place. Here are some of the usual suspects of negative cash flow:
Low-Profit Margin: A low-profit margin can cause a negative cash flow for businesses in the manufacturing and service sector. In the manufacturing sector, it is a good idea to set the price of your products a little lower to encourage the sale of more units. If you do not want to do that, you must invest in producing a product with high demand or invest in advertising to increase the awareness of your product. On the other hand, a service business should increase the volume of services it offers.
Overinvesting: If you are running a business with a negative cash flow, you are probably investing more than you can afford to. It might be a good idea to curb your spending for a short period until you can increase your sales.
Unexpected Financial Expenses: The loss of your leading supplier or a delay in the shipment of your products can be a reason for your negative cash flow. When such unfortunate events happen, you might need to pay more for the goods you are purchasing. To prevent this, it is best to have a backup supplier.
Conclusion
Negative cash flow can be caused by unforeseen events or poor business management. The key to overcoming negative cash flow is to work on ways to prevent it. It is common for businesses to experience a negative cash flow at some point in their lifetime. The important thing is how you deal with it.
Most importantly, you need a reputable eCommerce accountant to help you deal with the negative cash flow. There is no one better to aid you in this critical period than The Ecommerce Accountant. We have the experience and the expertise to steer your company back to a healthy cash flow. Contact us now for more information!