Cash flow offers an accurate representation of your business’s profitability. Regardless of what products or services your business sells, you can use this metric to determine whether your business is succeeding or failing at generating profits. Cash flow, however, can have a positive or negative value. For effective cash flow management that helps your business succeed, you must understand the differences between positive and negative cash flow.
What Is Positive Cash Flow?
Positive cash flow means your business received more cash — or other assets for than matters — during a given period than what it spent or incurred during the same period. All businesses have incoming and outgoing cash. Incoming cash refers to payments from customers or clients as well as money generated from other business-related activities, such as investing. Assuming your business’s incoming cash is greater than its outgoing cash, the value of its cash flow will be positive.
What Is Negative Cash Flow?
Negative cash flow, on the other hand, means your business spent or incurred more money during a given period than what it generated or otherwise received. A negative cash flow is concerning because it indicates your business is spending more money than it’s making. If your business has some cash reserves, it may be able to weather a short period of negative cash flow. Eventually, though, it will need to change its practices to achieve positive cash flow. Allowing negative cash flow to go unchecked for an extended period will quickly drain your business’s finances. Negative cash flow, in fact, is a common reason why small businesses fail.
Tips to Improve Your Business’s Cash Flow
Even if your business’s cash flow is negative, there are ways to turn it around. For example, you may be able to improve your business’s cash flow by switching utility companies. If your business operates out of an office or building, shop around for different utility providers. With a little luck, you may find a new utility provider that offers a lower price than your business’s current provider.
Another way to improve your business’s cash flow is to lease equipment rather than buying it. When you lease equipment, you’ll essentially pay to use it. Therefore, it’s almost always cheaper in the short term to lease rather than buy equipment. The only downside is that you won’t own the equipment when you lease it. You can also send invoices to customers and clients more quickly. The sooner a customer or client pays, the better.
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