Negative cash flow definition
/What is Negative Cash Flow?
Negative cash flow describes a situation in which a firm spends more cash than it takes in. This is a relatively common situation in the first few months or years of a business, when it is still ramping up production and searching for customers. It may also be caused by excessively low product margins, excessively high overhead costs, poor credit management, or fraud losses. During this period, negative cash flow is supported by debt or equity funding. If a business experiences negative cash flow over the long term, it will likely fail or be sold off, unless investors are willing to inject more money into it. This condition arises when a firm’s business plan is flawed, it is poorly managed, or fraud is draining away cash.
Examples of Negative Cash Flow
Here are several examples of situations that can cause a business to experience negative cash flow:
Extended payment terms. A large retailer forces a small supplier to accept 120-day payment terms, so that the retailer’s payments to the supplier are significantly delayed.
Excess overhead. The entire family of a company’s founder is employed by the business at excessive salaries, resulting in persistent losses and negative cash flow due to these payouts.
Extended development cycles. It takes a business an excessive amount of time to devise new products, resulting in the firm having to cover operating expenses with no offsetting sales of new products.
Low margins. A business sells products into a highly competitive market, where products are undifferentiated. Since its goods are commoditized, the firm is forced to offer low prices, resulting in low margins that do not allow it to generate any profits.