All entrepreneurs and many executives face in their professional careers the dreaded negative cash flow scenario.

For entrepreneurs this is a normal phase going from start up to, hopefully, mature company. For CEOs it can happen during an economic downturn or if the company had previously made serious mistakes or faced a catastrophe.

The underlying mistake that these managers nearly all make is to consider cash flow break even as a goal. It is a milestone. The goal, of course, is a pre-agreed return on equity (ROE). There might be many more milestones, such as cost per unit and number of customers, but ROE is the target.

The danger in negative cash flow situations is that unlike positive cash flow companies there is an urgency to make good decisions before time, or money, run out. This urgency creates stress and quite often panic in entrepreneurs and CEOs alike as they scramble to manage a completely unfamiliar situation. The sad result is a wannabe leader destroying his company in panic before abandoning the company to its fate, having done too little to matter but leaving too late to allow a more suitable candidate to turn things around.

The absolute first step in any negative cash flow situation is to stop deluding yourself, your employees, your board and your shareholders. Stop trumpeting profits when cash flow is negative. Stop hiding behind non-recurring operational cash flow. Most of all, stop believing that some repeatedly unsuccessful business line will miraculously generate cash flow in the near future let alone enough cash flow to save the company.

The second step, and this is vital, is to focus on revenues. It is an amateur mistake to believe that cost cutting is the priority for cash flow negative companies. If you do not understand where your future revenues are going to come from, how do you know what to cut? Think of it this way: if a surgeon needed to operate on you in an emergency, would you want him to just dive in and start cutting, or would you prefer that he diagnosed you first to understand what would keep you alive and protect you at all cost?

The trap in forecasting revenue in a cash flow negative company is assuming that the current product and service portfolio will become profitable again. A brutally honest assessment of what works and what new product development is needed has to be performed. Sitting month to month and quarter to quarter making excuses for why the same old tired products and services have failed to work is simply corporate suicide. Stop wasting shareholder money.

Once you have an idea for how the business might create sustainable positive cash flows you can then begin to look at costs. Doing it the other way around leads to great short to medium term performance improvements, but you will lose all ability to generate meaningful future cash flow. Do not be too fearful of cutting less than you need to in the hope that things might turn around. You will only create a cynical corporate culture that leads to much of the best talent sooner or later leaving and thus fueling the downward spiral of the company. Any talent left is only there due to misplaced loyalty or difficult economic times.

At this point, the savvy entrepreneur or CEO will have a good turn around plan that they can execute on. This is also the time to formulate a funding plan. Funding, whether via an equity investor, bank debt or other avenue is not easy and yet far too many an entrepreneur or CEO has made the mistake that they can simply waltz in to an investor’s office or a bank and get an investment or loan based on charm or charisma. They nearly always fail miserably, which adds to their panic. Instead, think long term, plan for funding early and build a robust and above all realistic business case.

The way that most entrepreneurs and CEOs manage a negative cash flow scenario is misrepresent the situation to their employees, board and shareholders and then to gain breathing room by irresponsible cost cutting. There is a better way and that is to trust your stakeholders to support you and to plan properly.

The next article in the series looks at breaking the cash flow break even barrier.

This article was originally published in The National.