August 16, 2011, 5:00 am

Why It’s Okay to be Cash Flow Negative

by: The Financial Blogger    Category: Business,Make Money Online
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cash flow negativeAbout 2 weeks ago, I produced my Monthly Blog Income Report. I mentioned that even if I had a month with over $5,700 in income, I was still cash flow negative in my business. How the hell was I able to throw $6K out the window of a business that doesn’t even have a proper office?

 

Several readers became less enthusiastic about my income report once they knew that I am spending about 6K per month on it. Therefore, even when I generate $8,000 in a month, they consider that I only clear 2K… which is split in 2 with my silent partner. But the reality is a little bit more complex than this and I think it’s important that I explain why I am not too worried about being cash flow negative with my business.

 

#1 I’m spending money that I have already earned

I guess this is one of the biggest points: it’s okay to be cash flow negative for a few months if you have already accumulated this money previously during the year. For example, I had months of $10,000 and $12,000 earlier this year. Since the cost of running my online business is pretty steady on a monthly basis, I have accumulated $10,000 in profits with only these 2 months. Last month, I was cash flow negative by about $500. So it’s not a big deal overall.

 

When you run any kind of business and even when you look at your personal balance sheet; it’s not the end of the world to be cash flow negative if you have already earned this money in another month. For example, if you review the month where you are going on a 2 week cruise; you will definitely be cash flow negative. But as long as you know why and that you have budgeted your vacation, there is nothing to worry about!

 

#2 I’m spending to grow

I have discussed this in the past but I think it is very important that I bring it back to the table this morning: we could be putting more money in our pockets but have decided to invest in several projects instead:

Niche websites

eBook writing

and bigger websites that will be discussed later on.

If you look at my company as you would look at a stock, you should look at it as a fast growing company that is cash flow negative because it prefers to invest in its growth instead of reaping the benefits already. I’m glad I can make 6K-7K or even 10K on good months but I want to make more. Once we reach over 10K as an average, we will probably start to pay out and reward ourselves for non-stop efforts since 2008.

 

#3 know what you are doing

The problem is not with being cash flow negative when you are down during a period of time. The problem is when you don’t know why or that you become stuck in a high cost structure. If you have a fixed and non-flexible cost structure, being cash flow negative is a real issue. However, if you are spending most of your extra money on specific projects that you can put on hold at anytime you want, you shouldn’t be worried.

 

I don’t see my current company spending as pure expenses but more like intangible investments. I know it will take time before I recover my investment and start making some money but I know it’s worth it. Once a website explodes and start making money, it can only grow!

 

For example, I could probably sell What is a Dividend for near $2,000 considering its traffic and monthly income (which is near $100/month). If I only sell this site, it would pay for all the costs involved in the niche website creation so far. However, if I keep it and let it grow, I’m sure I’ll be averaging $500/month with this site within the next 2 years. If I can have similar successes with 2-3 other projects, I will have succeeded in creating important sources of passive income.

 

Are you willing to go cash flow negative for a project?

Going cash flow negative is just a prudent way to use leverage. Instead of borrowing a lot of money in one shot and start building assets with more capital, you slowly use your earned money or borrow at a slow rate to bring your monthly balance sheet back to even. With this method, it allows you to shoulder less stress and easily manage your projects as they don’t grow too big in a single month.

 

I’m wondering how you grow your business or personal balance sheets? Are you using only the money in your bank account? Are you leveraging? Are you going to accept a cash flow negative statement once in a while for the sake of growth?
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Comments

It makes perfect sense that you are pouring more money into your business to make it grow. I am surprised that other readers haven’t been following your line of reasoning.

by: The Financial Blogger | August 16th, 2011 (7:34 am)

@Cashflowmantra,

most people like to use what they have in their pocket and not take any risk. They consider borrowing to invest or any other kind of leveraging risky. I consider not leveraging risky. I guess it’s all a matter of perception ;-D

I think this is one of the great incentives to use the internet to start up your own business. The overhead is low, the initial risk is low, and you can easily manage it in addition to your day job. This means that most people do not depend on the cash flow to pay for their monthly expenses. This allows you to patiently re-invest the proceeds back into business. You guys are now on such a large scale that I bet your way more efficient at allocating capital productively within your company than you were before.

by: The Financial Blogger | August 16th, 2011 (8:52 am)

@Teacher Man,
it’s actually quite a challenge to allocate correctly our cash flow. While we have improved our processes, we are still learning.

it’s tempting to spend a lot of money on several projects and not looking at what really pays off!

Nice update! I agree with @Cashflowmantra me and my team have been re-investing every dollar we earn back into the company, developing new sites and growing our community.

Cash flow doesn’t really matter that much, it’s the bottom-line income that does. Eventually you need to have positive cash flow, but if you plan to go negative for awhile then that’s ok. It’s if you don’t have a plan and are consistently going negative that you’re in trouble.

Growing businesses usually need a bit of time for the revenue to catch up with expenses. Also, growing a business out of its own earnings is sometimes very slow. It’s exactly the same as buying a house. You get a mortgage so that you can enjoy the house for decades before you have the money to buy it. With a business, you grow the business fast and have a solid, running business for longer .

I think it’s fine to go cash flow negative on the understanding that the investments you’re making now will pay off.

However, more than half of your net worth comes from your business, which you value at $98,000. This wouldn’t be a big deal, but you sure do have a levered balance sheet. At what point does your debt start to be a concern to you? Liquidity issues?

I have not been passionate enough about a project to take a short term loss. In my side projects I pride myself in profitability….usually recapping my purchase price of a site within 2 weeks.

I wouldn’t personally be comfortable ever spending more than what I make in a single month working from home, but I am highly risk adverse and my operating costs are significantly lower. I’ve been bringing in $4000-$7000 a month from my blogs and my online side income streams (like commenting for cash like this one), but my expenses are $150 or less usually and about to rise to $500 or less since I am outsourcing my social media like my newsletter. I’m just too cheap to outsource much, lol.

So, I follow your line of reasoning and say woot. I’m just a bigger wussy when it comes to expenses…

Nothing wrong with having high expenses if you are growing the business. Of course, there is no guarantee that the investment will pay off, but that’s the chance you have to take.

Good post. I agree with Money Smarts here – high expenses are OK short-term if long-term growth is evitable. For you, it seems like it is 🙂

On that note, great work on What is Dividend site. That’s some good income from a very new site, but certainly the content helps!

Cheers,
Mark

Cashflow negative is OK for a short while if there is a light at the end of the tunnel. It’s great that you invest in your business and I think that’s the way to go.

Having expenses exceed income in a given month would make me a bit nervous. However, what you’re spending your money on are assets/investments that’ll generate additional income in the future. You’ve done your research, and taken deliberate actions to expand your business. If you are a tiny bit nervous, I imagine the nerves are combined with excitement.

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