In Business, What Are Common Reasons for Negative Cash Flow?

Negative cash flow refers to the amount of cash spent (purchases, wages, taxes, etc.).

Negative cash flow

Right!

Negative cash flow refers to the amount of cash spent (purchases, wages, taxes, etc.).

Net cash flow is the difference between positive cash flow and negative cash flow. It can answer the most basic business question: how much money is left in the fund pool. Positive cash flow refers to the amount of cash in sales (sales, interest earned, shares issued, etc.).

Chinese name

Negative cash flow

Foreign name

Negative cash flow

There are two ways to stop negative cash flow: speed up the collection of customers or extend the payment time to suppliers

Surprisingly, every business has the ability to predict and avoid cash flow problems caused by sales. With a few simple numbers in your balance sheet and income statement, you can completely avoid problems that may arise.

Suppose you are engaged in the wholesale business of high-end red wine, and wholesale it to restaurants and retailers on a case-by-case basis. If all customers pay for the goods with one hand, of course, there is no problem. But recently, more and more customers have proposed to switch to deferred payments, and some of them are already delaying payment. How long can you hold on?

Obviously, things have gone off course. But don't be nervous. Take out the ledger and a calculator to see the future cash flow situation.

This calculation method is fast and simple. Starting from the receivable items on the balance sheet (how much the customer owes you in total) and the sales records of the past 12 months on the income statement, use a simple formula to calculate how many days you spend on average to recover the payment from the customer. This is "days outstanding" (DSO).

The job is half done, and look at your payment speed. Start with the total payables (how much you owe the supplier) and the sales records over the past 12 months to figure out how many days on average you need to complete the payment. The result is "days payables outstanding" (DPO).

If you pay the bill yourself longer than the customer pays you (DPO is greater than DSO), cash is flowing in and accumulating. However, if your customers are more procrastinating (DSO is greater than DPO), cash is flowing out of you. The larger the difference (DPO minus DSO), the faster the cash flows in or out.

How bad can it be? This difference, or "current value," is the number of days that each year's sales (cash value) flows in or out of your business. For a company with a turnover of 1 million US dollars, just one week of negative flow will cause a capital gap of nearly 20,000 US dollars on the book (calculation formula: sales / 365 × current value). To make matters worse, this gap could disrupt a payment cycle.

There are two ways to stop negative cash flow: speed up the collection of customers or extend the payment time to suppliers. As long as one of them is done, the gap can be closed. If both are successfully realized, you have enough cash flow to wait for the harvest period.