What is a temporary cash gap? The cash gap formula calculation

Any well-functioning organization operates according to certain rules. The process involves the acquisition of raw materials, energy resources, sales of goods and obtaining payment from consumers. Ideally, all operations should be performed evenly, but in some cases there may be a delay – the cash gap.

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Sometimes the operating cycles do not coincide with the financial action when consumers have not paid for the item purchased, but must be ordered raw materials for another party for that same money. Such situation is characteristic for the activities of not only small, but also large organizations.

We should Not think that the temporary cash gap – is the result of malfunctioning of the managers or of the miscalculations of accounting. Often the causes are quite objective. However, managers are obliged to reduce these phenomena to a minimum.

Main reasons

The appearance of delays between the work processes can lead not only internal but also external factors. They equally can influence the functioning of the enterprise. However, external circumstances much more difficult to predict.

The Main causes of the cash shortages the following:

• Revocation of license and other force majeure, resulting in an accepted Bank;
• Change the address of the organization requiring re-registration in different authorities;
• The transition to another tax system, abolishing or includes payment of VAT;
• Non-optimized methods of doing work;
• A hitch by the debtors;
• Problems with exports in the imposition of sanctions or other restrictive measures;
• The increasing complexity of legislation in the country.

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It is Possible to enumerate many circumstances that can lead to the emergence of pauses between your current processes. However, in most cases, they occur due receivables.

Management of risk of occurrence

Managers have to always think about how to avoid cash gaps in the course of doing business. Risk management is based on General principles and includes the proper distribution of markets, diversification of products, insurance and minimizing the negative effects. Should be mandatory prepared documents, providing the ability to attract the necessary funds in the event of delays.

Sometimes organizations issue a certain amount of securities registered in the name of the Trustees. In some cases, are special contracts of assignment, which allows to transfer the rights requirements of certain liabilities. Copies of these documents are usually notarized. They can be useful to provide banking institutions to conduct financial monitoring.

To cash gap does not occur regularly, you should carefully consider the terms of signed contracts. In them it is desirable to provide prepaid options and to prescribe the timing of payments to the end of the previous month. A useful tool can become a Bank Deposit with the possibility of early disclosure. To diversify risk, it is desirable to have an account in another Bank.

With regular work with a balance reports often identified the reciprocal obligations. Rational decision will constitute a partial repayment, to be able to use them as an effective tool when it comes to delays. They can be used to quickly raise funds.

Identify Features

With No idea of how to determine the cash gap, it is impossible to be effective in the enterprise. To avoid such processes it is necessary to carefully analyze the cash flows and look for vulnerabilities. If at the beginning of the production cycle there is a negative balance, we can say that unpleasant moment came.

You Also want to explore the range of goods in a warehouse. If their contribution overlaps the subsequent delivery, then the situation is not critical. However, only according to these indicators, it is impossible to identify a cash gap. The calculation formula is the following:

The operating system+DP-PP=TO.

The table provides explanations for the symbols.

Calculations by this formula should be done on all working days for the timely identification of delays. If the calculations turned out to a negative number, it is good to reflect on the first two points to cut off their payments to suppliers.

Common mistakes in attack

Many CFOs taking a very right decision.

1. Issued short-term loans that do not bring tangible results. But they increase the amount of future payments as they accrue interest. Such a strategy can bring success only when there is a clear plan for the development of enterprises.
2. In case of prepayment made huge discounts, which in some cases do not cover costs on output.
3. The raw materials required for production are paid at the end of the period, which disrupted the rhythm of the enterprise.
4. Sold part of the available capital to larger organizations.

Actions during a period of cash gap

Although many companies reserves abound, yet it is not always possible to fully protect the company from delays. To panic in such a situation is not worth it. It is necessary to evaluate the probable consequences of non-payment and determine the available time margin for carrying out countermeasures.

To prevent problematic situations can be the following.

1. Suspension of payment transactions for the supply of goods with reference of letters of guarantee, which will indicate the date of depositing funds.
2. Early disclosure of Deposit in the Bank.
3. The Involvement of third parties to make payment directly for the obligations of the company.
4. Written requests from consumers to enhance the repayment of outstanding debt.
5. The Presentation in payment of securities.

After the onset of the best times you need to replenish internal reserves, which were taken cash in a difficult period. Not superfluous to underline consumers and suppliers, helping the company. To mitigate the negative moments will help positive reputation of the organization, on the formation of which is necessary to work constantly.

The consequences of the mistakes of management?

In some cases, the cash gap becomes the reason for the unbalanced financial flows. Sometimes funds are invested in different or adjacent segments of entrepreneurial activities within the same category of the companies, and it has its negative effects. In addition, not always regular resourcing runs smoothly. It largely depends on the coherence of Directors.

Often taken out of circulation money to invest in a new project which has prospects of quick profit. Miscalculations on the part of management in this situation threaten to organizations whose income is a result of partnership activities, a negative situation in the business environment.

Alternative solutions

There is other ways to cover temporary gaps. The first of these is to provide commercial credit directly by the vendor, and the second – in encouraging consumers to exercise the early payment charged by enterprise accounts.

The Holding company can:

• Create the Treasury, providing the opportunity to optimize working capital, while reducing the amount of the loan;
• To make the centralized procurement of certain categories of goods, saving resources by increasing the volume of the delivery;
• Get an overdraft to cover the missing funds.

Final part

As the textbook for beginners can be taken from the planning technique of temporary cash ruptures of the budget. It is created in full accordance with the Russian legislation to determine the amount of the debt formed during certain time intervals.