How to manage negative cashflow

Cash flow refers to the movement of money in and out of a business, and it is a critical factor in the financial health and stability of a company.  Negative cash flow occurs when a business's expenses exceed its revenues, resulting in a net outflow of cash.  For small and medium-sized enterprises (SME) to experience periods of negative cash flow, especially in the early stages of their development, is not uncommon.

Common factors that contribute to negative cash flow for SME are:

• SME may have a high level of fixed costs on expenses which must be paid even if sales are low.  These costs can strain a business's cash flow, especially if revenues are not sufficient to cover them.
• Long payment terms and slow-paying customers can create a delay between the time the goods or services are provided and the time the payment is received, causing a temporary shortage of cash.
• RIsks of unexpected expenses such as equipment repairs and COVID hospitalization fee for its employees can strain SME cash flow.

By understanding factors that contribute to negative cash flow, SME can take the following steps to manage their cash flow more effectively and avoid financial distress.

      1. Review expenses and look for ways to reduce unnecessary costs. This can include negotiating lower prices with suppliers, streamlining processes, or reducing inventory levels.
      2. Increase sales through marketing and sales efforts, such as promotions or new market expansion.
      3. Offer early payment incentives such as discounts for early payment for customers to avoid late payment.
      4. Review payment terms with customers and suppliers to ensure fairness and flexibility.
      5. Be well prepared for the unexpected by securing a line of credit.

Negative cash flow is not necessarily a cause for concern if it is only temporary or if the business has other sources of funding, such as a line of credit or a business loan, to help manage its cash flow.  However, if negative cash flow is persistent or severe, it can be a sign of financial distress and may require the business to take steps to improve its financial management or seek additional funding.