Tips on Improving your Business Cash Gap

The Cash Gap affects many small businesses both in a positive and negative way, depending on how it is managed. But what is the Business Cash Gap and why, if not managed effectively, does it cause so many sleepless nights to the business owner.

The cash gap, as the name implies, refers to the gap within in the cash cycle, between payments made for purchases of inventory for example, and cash received from the sale of goods. The period when cash is at its minimal/non-existent, between these two activities is your Cash Gap. So in essence a short cash gap relates to the paying and receiving of cash in a short space of time, and a longer cash gap occurs in a longer cash cycle.

To control your cash gap, three factors need to be monitored within your business, namely the Accounts payable, Accounts receivable and Inventory. These functions contribute to the availability of cash within the business and have an impact at differing stages of your cash cycle. The ideal situation for any business would be to shorten the length of the cash gap and this can be achieved by:

 

-          increasing the Account payable period,

-          decrease the collections periods,

-          increase inventory turnover, 

providing the following formula:

Inventory days on hand + receivable collections periods – accounts payable period = 

THE CASH GAP. 

Tradition and the nature of the business often sets the typical cash gap in a given industry and thus some businesses have inherently higher cash gaps than others.

Some of the benefits of a shorten Cash Gap are:

 

-          Cash availability for expenses and growth

-          Shortened Customer payments

-          Reduced business debt

-          Longer payment terms to suppliers

-          Reduced inventory cost

-          Improved cash management activities

Monitoring your business cash gap aids in ensuring your business does not get caught unaware in times of unexpected expenditure and has the added advantage of making use of any excess cash in the business to provide additional income. The cash gap is a simple concept helping business owners understand how their actions affect the Business Cash flow.