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The cash flow in your Westchester company is demonstrated by cash flow. It represents a company’s cash inflows and outflows over a specific time frame. The company creates cash flow statements to show the sources and uses of funds over time. Positive cash flow refers to having more cash coming in than going out, which is beneficial for your company. However, it is harmful when cash outflows surpass cash inflows. For more information about negative cash flow, contact an accountant in Westchester, NY.
How can your accountant deal with your company’s negative cash flow?
As mentioned before, negative cash flow occurs when your company’s outflow of cash exceeds its inflow. Your earnings are not sufficient to pay for everything on their own. You also need to get funding and investments for your financial needs.
Depending on how your company operates, you may have cash flows at different times. For example, spending a lot of money implementing a plan for growth could result in overpaying. Your cash flow will be negative as a result. Insufficient funds to pay your bills on time when your customer’s invoices are outstanding is another example of negative cash flow. This negative cash flow thus demonstrates the lousy timing of both income and expenditure.
It is important to remember that negative earnings are not always a bad thing. Negative cash flow is normal for new businesses, and they can continue to spend in order to keep up their lower cash flow and eventually boost their earnings. Therefore, an organization of any size has negative cash flow. However, recognizing and addressing the root causes of negative cash flow is essential to the long-term objectives of your business.
What leads to negative cashflows?
The following are the top five most common reasons for negative cashflows that you should consider:
1. Low Profits
Profits are the primary source of income, just like in any other business. Low or no profits could be an outcome of multiple factors:
- Inadequate sales and marketing techniques.
- Low productivity of manufacturing units.
- The high operating costs or undervaluing of your product.
These often end up in insufficient funds to maintain operations.
1. Overdue Payments from Customers
A 2019 QuickBooks research suggests late payments can severely impact a negative operating cash flow cycle. The amount of outstanding receivables for SMB owners in the US grew by 81% between 2018 and 2019. Approximately 71% of participants said that late payments harmed their capacity to pay suppliers.
2. Unexpected Costs
The most common cause is unexpected expenses, including taxes, shrinkage, insurance premiums, and equipment upkeep. As a company owner, you were unable to anticipate these unforeseen expenses in a financial plan. In order to deal with the irregular cash flow and avoid negative cashflows, you must set aside cash.
3. Excessive spending
A company or an individual investing needs to have a strategy that takes into consideration a variety of factors. For example, you establish a plant without first determining the actual extent of demand for your products, believing it will increase results and income. However, you soon realize that the plant’s maintenance and repair costs surpass your higher revenues. Finally, you have this facility instead of the money you need to run your company. Therefore, excessive expenditure may work against the interests of your shareholders and business. It may, therefore, quickly result in negative cash flow.
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Rapid Growth
Your company should constantly be growing, and that can only happen with an effective strategy. Your money and effort will be wasted unless your business has a well-thought-out plan for growth. Growing your business rapidly is an alert sign. Also, a number of growth-related issues affect your cash flows. For example, irresponsible hiring, a focus on immediate gains, and poor financial tracking.
Conclusion
Before investing, your stakeholders—especially investors—check your cash flow statement. It makes a negative impression if there is inconsistent positive cash flow. This is the reason why a lot of potential investors will walk away from your business. Additionally, banks reject your company’s fixed-rate interest loans or charge you more for the same reason.