The cash gap is.. Cover the cash gap

The Most common problem of many businesses is as follows. The company operates in its usual mode, supply orders, and bears any costs. Fit the end of the month, you need to pay monthly expenses (rent, salary), but money is tight. This is called the cash gap.

The Main problem companies

The Cash gap – intermediate to lack of funds. When it comes time to spend money and revenue that were planned, no, there is a cash gap. This problem may appear at all enterprises of any form of ownership. Its appearance is not always about the illiterate policy of the company.

The Reasons for lack of funds

The Lack of necessary funds in the accounts may occur for various reasons. For example:

• Illiterate organization of corporate Finance;
• The delays;
• The unstable situation on the market;
• Export factors.

When the company planned cash receipts, you should consider the timing of these receipts from customers and the timing of transfers to their suppliers. Very often this is a problem. Therefore, such organization of Finance of enterprises is one of the reasons for the lack of funds in the account.

Also caused shortages are unscrupulous buyers who delay payments. Very much will appear the so-called financial hole, if the buyer asks for deferred payment. The consequences of this situation can adversely affect the stability of the company.

There are so-called temporary cash gap. It is possible to predict, in contrast to the constant gap. To the consequences of such a situation was minimal, should develop a specific plan of action.

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Example of cash gap

For example, the cash gap as follows. There is a company that is engaged in the production of bakery products. Once a week she buys raw materials from suppliers and pays for it on delivery day, that is the fact. Selling finished products is performed with delay of payment for 5 working days. For example, on Monday, was delivered goods worth 1.5 million rubles in the same day, the supply of raw materials in the amount of 1.0 million rubles. Under the terms of the agreement, the company must pay on the delivery of raw materials, so she immediately pays the order in full. Remains on the account of the company 500 thousand rubles. In the last day of payment on Friday, the customer receives money in the amount of 400 thousand rubles. Next Monday again is purchase of raw materials by the same amount (1,0 million). But on account of the company is 900 thousand rubles. Thus arose the cash gap budget in the amount of 100 thousand rubles.

The company is facing the following consequences:

• Fines for late payment;
• Shortage of supply of raw materials, which is fraught with infringement of technology of production;
• The reputation of the company will be threatened.

Future Forecast

How to calculate cash gap? We'll see.

The Cash gap – this is a problem that can and need to predict and calculate. This should prepare the financial report on cash flows and identify the types of costs. If at the beginning of a new operational period for the manufacture of a negative value, it means there is a cash gap. You should also analyze the remnants of raw materials. If their quantity is enough until the next procurement, the situation at the enterprise is stable.

There is a formula that can calculate such a problem as the cash gap.

Formula

DS+PD-PP=SLM where:

DS – cash at the beginning of the day;

PD – received payments;

PP – payments to suppliers;

SLM – cash at the end of the day.

If the value of the UDF is negative, it is recommended to work with debtors that their debt would be a negative value.

Experts recommend doing this calculation every day.

Bug fixes

In order to cover the cash gap, you need to make daily detailed report on the above formula. You should find out which factor is the cause. You can then make further decisions. Below are possible ways of dealing.

Daily work with accounts receivable. Should every day contact with customers, to communicate, to find out the reason for the delay of payment, to find common solutions. If you have the opportunity to provide trade credit, you should remember several factors: the need to establish adequate limits on the loans to sort debt conduct reconciliation with debtors.

You Must try as much as possible to seek loans.

Important proper preparation of financial reports, proper calculation of cash flow.

How to reverse the effects

The Cash gap – a situation which is detrimental toenterprise. You should think about mitigating the impact for the company. This can be done in the following ways:

• Suspend the mandatory payments to the organization - it is better to pay the taxes a month later, as the penalties will be much lower than the overpayment in the form of interest on Bank loans;
• Invest owners;
• Use of the scheme of factoring - banks may buy at a deep discount receivables only proven contractors (this method is more suitable for larger organisations);
• To work with the contractors might suppliers will be able to delay payment, because they, too, are interested in this (if the company constantly uses the services of the same organization for a long period of time, the provider will meet);
• Get a Bank loan.

Loan as a way to get rid of the cash gap

One way to mitigate the cash gap – get a loan from the Bank. Without guarantors the loan amount may be insufficient to repay the gap. To receive credit on a large scale, should follow a few rules:

• To Apply to multiple banks. This will allow you to obtain a good credit history, most financial institutions and allocate the total cash requirement. New customers will have to wait a bit, but if you apply again, then the loan terms can be revised in favour of the organization.
• When contacting the Bank it is better to apply for an amount greater than the cash gap. In this case, the higher the probability that a will provide the desired amount of cash. In such a situation, reducing the cash gap will be accompanied by an increase in the cost of servicing the loan.
• If you have the opportunity as security to provide the property, you should only use one that does not require state registration.
• Contact the Bank in advance. For example, if the old contract ends in a month, it's time to issue a new agreement on the same terms. Next month a large part of the proceeds will be used to repay the loan, and current needs will be closed new loan.

In Detail, this situation can be considered as an example.

The Organization received its first loan in July 2016 in the amount of 5 million roubles on the security of the premises. In the contract spelled out the payment of the loan in two instalments in August and October of the same year at 2.5 million rubles. In October the organization issued another loan on the same terms at 5 million rubles. The contract stipulates the restriction that the total amount of the loan shall not exceed 5 million rubles. Revenue received in August will go to repay the first loan. All payments of the company will be closed the second loan. This scheme will help to preserve working capital.

Draw conclusions

The Cash gap – the lack of money that to prevent is easier than to eliminate its consequences. Therefore, companies should conduct a thorough and competent analysis of all financial flows of the organization in constant contact with the debtors to try to solve problems together and to have good relations with suppliers. In fact, this is the basic principle of cash management.