How to Close the Cash Gap

To begin with, let’s briefly go through the main reasons for the cash gap occurrence. They could include:

1. The absence of a financial accounting and planning and forecasting system.
2. Overdue payments because of uncontrollable installment and deferral system.
3. Inefficient work with accounts receivable — nobody pays attention to collecting money
4. Money withdrawals from business by owners before knowing financial results.
5. Taking money out of operations into other activities. For example, investments in securities.
6. Lack of accumulation funds and rainy day funds for businesses.
7. Mistakes in the volume of procurement. For example, a company ordered a new product without having studied the audience’s demand for it.
8. Drop in sales, which leads to a decrease in cash flow from customers.
9. Unprofitability of the business itself, which the owners didn’t notice because they hadn’t kept records of income and expenses and financial results.
10. Force majeure, pandemics and natural disasters.

There are a lot of reasons for the cash gap occurrence. Businesses should be checked by all criteria mentioned above. If a company fits into at least one category, there is a risk. If a business has two or more matches with the list, owners have to pay more attention to the financial stability and solvency.

Besides, it’s of key importance to understand if the cash gap is a force majeure, a temporary phenomenon or a chronic situation. If cash gaps occur rarely, it’s not that difficult to deal with them. However, if a business suffers from them constantly, the company has severe problems with profitability or its current condition matches with several factors from the list above.

There are different ways to solve the cash gap problem which could be divided into long-term and short-term ones.

Problem solutions are listed in descending order of their importance and complexity. If your company rarely faces the cash gap problem, look at the end of the list. However, if you are always looking for a way to make ends meet, read from the very beginning.

1. Implement management accounting and financial planning
The owner must understand the financial status of the company, revenue, and costs. This information must be constantly updated and the management always needs it to run the company efficiently. Due to it, three management reports must be maintained: Revenue and Expenditure budget, cash flow statement, and Balance Sheet. It will allow you to control the status of accounts receivable and payable.

2. Develop a profitable business model
If the implementation of management accounting reveals that the company’s activities are loss-making, it’s necessary to correct the situation. The first thing to do is to find key factors of income increase. This can be reducing costs, increasing revenue with more profitable products, closing loss-making business lines, etc. After that, the main goals are to develop a way to achieve the necessary income and to strive for its realization.

3. Deal with accounts receivable
It’s important to develop regulations on the work with accounts receivable to do it successfully. For example, you could reduce the number of delayed and overdue client payments.

4. Deal with accounts payable
The best way to solve a problem of business solvency is to learn how to negotiate deferrals.

5. Create a financial safety net
Any company needs to form reserves and accumulate funds for emergencies. There are different opinions about the size of rainy day funds. The most common is that reserves should be equal to the sum of the company’s expenses for three months.

6. Implement KPI systems
KPI systems are a great way to motivate employees who work with client payments to perform their duties more efficiently.

7. Set rules for dividend withdrawal
It’s necessary to introduce rules for owners. They need to fix how and how much money they will withdraw from the business. The best solution is if the owners assign themselves a salary. The rest of the desired amount will be received as a percentage of the profit if there is any.

8. Implement a payment calendar
A company needs to have a specific plan where a schedule of receipts and expenditures, as well as information about the balances at the beginning and end of each day, would be presented.
All these actions affect solvency systematically and on a large scale. They make the occurrence of cash gaps almost impossible.

Also, there are some additional actions which can help business here and now.

1. Take a loan or credit
It’s better to know about the cash gap in advance. Then you’ll be able to take a loan on more favorable terms. For example, loans with benefits or the ability of deferring the principal.

2. Set up an overdraft
Overdraft is a loan type. Its special feature is that the company would be able to spend more money than there is in a bank account and go negative for a certain amount. Overdraft is set up once and used if it’s necessary and then returned to the account. Overdraft could be used again if the cash gap occurs one more time.

3. Pause new projects
Term of this action depends on the duration of the cash gap and severity of its cause. Some projects may be closed for good sometimes.

4. Reduce business expenses
We are talking not about systematic work but about short-term reduction of individual expenses. It could be both unnecessary expenses such as corporate party or employee education, and more important like advertisement, marketing and even salaries.

5. Use extra tools
The company can try to sell the debt, a part of the property or use factoring. Any of these actions would help to get money, however, they can’t be used permanently.

Practice shows, if cash gaps are common and occur more than once a month, their cause is more serious than just overdue payments. Perhaps the problem is insufficient profitability, lack of financial planning and management accounting. And company management should pay more attention to this if they want crises and cash gaps to stop bothering them.