How a Company Can Still Be Profitable with a Negative Cash Flow

Nicole Dwyer
How A Company Can Still Be Profitable with a Negative Cash Forecast

How A Company Can Still Be Profitable with a Negative Cash Forecast Smart business owners understand how important cash flow is to the success of their companies. Without cash on hand, it’s difficult to cover operating expenses such as salaries, rent, utilities, and supplies. When money’s tight, pursuing new opportunities is out of the question.

For these reasons, business owners are constantly worried about their cash flow, and they do everything within their power to ensure they bring in more money than they pay out each month.

Just because a company has a negative cash forecast, however, doesn’t necessarily mean the future is all doom and gloom.

Of course, negative cash flow that persists for an extended period of time can have crippling effects on any company. But over the short term, it is possible for companies to have negative cash flows and still maintain their profitability.

Here are four reasons that can be the case.

1. You make an excess of sales on credit during a particular month

Let’s say your company sells mattresses.

Sales have been slow over the last few months, so you’ve decided to launch a new program that enables your customers to put $100 down on a mattress and then make $50 payments over each of the next six months.

Your promotion worked, and sales are going through the roof. But your cash flow remains negative because your customers don’t have to settle their accounts in full for six months.

2. You use cash to cover capital expenditures

Business has been great over the last few years. You have a ton of money in the bank. Instead of paying rent to your landlord, you’ve decided that now is the perfect time to buy property of your own.

After a few months of searching, you’ve finally zeroed in on the perfect location. It costs $500,000. You put down $250,000 in cash and take a mortgage out to cover the rest.

Unless you absolutely crush it in sales that month, you’ll almost certainly experience a negative cash flow. But that doesn’t mean your company won’t return to a positive cash flow in the near future, and it certainly doesn’t mean that your company is no longer profitable.

3. You are paying a lot of cash to develop new products that won’t be ready for a while

Imagine you’ve come up with a great idea for an app. There’s one problem: You’re not a software developer. You decide to bootstrap your company, hiring one full-time engineer who’s fresh out of college and paying that individual out of your own pocket.

It takes an entire year for the app to be built. That whole time, you’re running on a negative cash flow. But then the hard work pays off: Once you release your app, paid downloads are through the roof. Your company is profitable, even though you had negative cash flow for an entire year.

This scenario plays out often in the business world.

For example, Netflix is spending billions of dollars developing new content—a lot of which won’t be ready for several years. The company has a negative cash flow today, but that doesn’t necessarily mean it won’t be profitable tomorrow. Time will tell.

4. You take advantage of bulk discounts—but you don’t use all the materials

Rather than buying supplies you need each month, you’ve decided to buy three months’ worth of materials to take advantage of a bulk discount offered by one of your vendors. This causes you to pay out more money than you usually do during a particular month, which hurts your cash forecast.

While you can’t pay your bills with the excess supplies you have left over, that inventory still sits on your balance sheet as assets. You’ll use those assets over the next few months—and you also won’t be paying out cash to acquire them.

You might experience negative cash flow in this situation. But your profitability shouldn’t be in jeopardy.

In an ideal world, you’d never have to worry about having to manage a business with a negative cash flow. But from time to time, many businesses—even very successful ones—pay out more money than they bring in during a particular period.

Whatever you do, don’t let a negative cash flow forecast catch you off guard. Make regular cash flow forecasting a top priority for your accounting department to keep your fingers on the pulse of your financial situation. Click here to learn more about how your business can increase output while reducing cost at the same time.

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