Cash gap at the enterprise
Stop trading… or the Cash Gap and its consequences.
Theory or reality
At least once, we all faced a lack of funds at the enterprise, and therefore a cash gap, even if we did not understand what it was. Because the cash gap is not just a term on paper, but a situation where the company does not have enough money to make current payments on its obligations.
Your sales department didn’t fulfill the plan, and you have no money to pay staff salaries. One of the batches of goods turned out to be defective – and you can’t pay the supplier of raw materials. A large client has not paid for your services, and you have no way to pay off your credit institutions. Sound familiar?
So, a cash gap occurs when the amount and timing of cash receipts from customers do not match the amount and timing of current liabilities to suppliers, contractors, and employees.
Financial snowball
It is clear that if you are unable to pay your obligations, this can lead to undesirable consequences, such as:
- Penalties (from suppliers or credit institutions)
- Incomplete delivery of goods, and therefore a decrease in sales
- Destabilization of social and labor relations with the staff
- Disruption of the production process (which is very important for a manufacturing company)
- Deterioration of relations with contractors and, in general, irreparable damage to your business reputation.
Diagnose the disease at an early stage
Even a short-term cash shortage can lead to serious financial stress in the company, which will grow like a snowball. Then a temporary cash gap will turn into a threat of financial bankruptcy. And we are not exaggerating. Therefore, it is necessary not only to know how to avoid or overcome a cash gap, but also to be able to fix it in time to take immediate measures to stabilize the situation.
To detect a cash gap or financial stress, you need to draw up a detailed cash flow statement, first planned and then actual. To do this, you need to collect the following data
- the cash balance on the company’s current accounts and cash desk at the beginning of the period (Cb);
- reflect the planned receipt of funds from debtors for each business day for the period (PR);
- reflect the amount of payments to suppliers, contractors, personnel, and tax liabilities for the period (TL).
And then you should apply the formula for calculating the cash balance at the end of the period (CBE):
CBE = CB + PR – TL
If the CBE is negative, this will indicate a cash gap.
In this way, you can predict the financial tension during the month and identify the cash gap in time, without waiting for its sad consequences.
It is better to prevent than to eliminate
Every entrepreneur understands how important it is to “keep your finger on the pulse”. But how can you minimize the likelihood of a cash gap? Let’s take a look at the main causes of a cash gap in a company.
As a rule, there are only two prerequisites for the emergence of a cash gap: imperfect financial planning at the enterprise and the lack of effective tools to close the cash gap.
A competent financial policy is already 80% of success
Therefore, the first thing you need is proper internal cash flow planning in the short and medium term (from a week to 6 months). This should be done by an experienced financier who knows how to develop a competent financial policy for the company.
It is necessary to take into account the timing and amount of cash receipts from customers and other sources (banks, financial institutions, partner companies, contributions from founders), as well as the payment schedule and the amount of the company’s liabilities.
Moreover, an ill-conceived financial policy of the company towards its customers can be a very serious mistake. But we’ll talk about this and the development of effective tools for closing the cash gap next time. This topic deserves a separate article.
The main thing is that by understanding the serious consequences and causes of the cash gap, you will be able not only to predict its occurrence in time, but also to prevent dangerous financial stress in the company.
In conclusion, if you do not understand how best to develop an optimal financial policy for your company or if it needs to be adjusted, you can always contact our specialist for help. Dextra Law will allow you to solve these issues professionally, taking into account the specifics of your business. Contact us by phone: +38(093) 38-35-895
