What Is a Cash Flow Gap? 4 Smart Tips to Fix It Fast

A cash flow gap refers to the difference between a company’s cash inflows (uncollected revenue) and cash outflows (expenses incurred). When revenues exceed expenses, we speak of a cash surplus. Conversely, we speak of a cash flow gap. And now that you’ve mastered the basic vocabulary, here are 4 tips for limiting cash flow gaps!

1. Shorten payment deadlines for debts

Unforeseen events, multiple transactions, payment delays, lack of anticipation: there are many causes of a cash flow gap.

To protect yourself as much as possible, you need to have control over payment deadlines. A simple and effective way to limit cash flow gaps in your business is to encourage your customers to repay their debts as quickly as possible.

Here are some actions to take to achieve this:

systematically request a deposit when ordering or validating the quote;
integrate billing and payment levels throughout the service;
use an automatic customer reminder service;

It is not recommended to ask for extended payment terms from your suppliers. This can cause significant cash flow delays. This purchasing process can still be considered exceptionally and under certain conditions.

2. Closely monitor your cash flow budget

Creating a cash flow forecast allows you to anticipate potential problems between income and expenditure . You are able to make regulatory and adjustment decisions early enough to limit significant cash flow gaps.

This advice is aimed at all establishments in the transition, installation, growth or financial difficulties phase.

To achieve this, you can place all financial flows (incoming and outgoing) in a cash flow table .

This action allows:

to obtain a simple overview of the company’s cash flow situation;
to assess the concrete risks linked to the loss of a major file;
to track receipts, disbursements and your cash balance.

3. Optimize the company’s inventory management

A company’s inventories are considered fixed cash. They pose a significant risk of depreciation. This includes obsolescence, loss, theft, and deterioration.

Good inventory management is therefore essential for any e-commerce or retail business.

The different types of stock

We differentiate between:

raw material stocks;
stocks of finished or semi-finished products;
small stocks such as office supplies, for example.

Managing and making the most of your inventory means not overstocking goods , anticipating stock shortages and optimizing storage space.

The ABC rule

This rule classifies stocks by volume and value:

Group A items (high volume and value): increased stock management for these items (80% of issues);
Group B items (average volume and value): average management (15% of outputs);
Group C items (low volume and value): minimum management authorized (5% of outputs).

The ABC technique is ideal for differentiating profitable operations from less profitable ones. This method improves inventory turnover and allows for a better allocation of costs by activity.

4. Use cash flow management software

Numerous cash management software programs have been developed in recent years to support managers in their daily operations. They allow for simple, fast, and efficient monitoring of a company’s cash flow.

As a true financial management tool for the company, this type of software helps you visualize the amount of funds available in order to respect the various budgetary commitments of your company.

Limiting cash flow gaps: in brief

To recap, here are the actions to put in place to stabilize your cash flow:

reduce payment deadlines for its customers;
monitor your cash flow budget;
optimize stock rotation;
use cash management software.

Now that your cash flow is improving, it’s time for a key calculation: net cash flow.

FAQs

How to calculate a cash flow requirement?

Knowing your company’s cash flow requirement, also known as working capital requirement (WCR), allows you to ensure its proper functioning: WCR = (customer outstandings + stocks) – supplier outstandings.

To find out the number of days you need to finance a year of activity, do the following calculation: (WCR/CA) x 360 days.

How does the cash cycle calculation work?

Calculating the cash flow cycle, or cash conversion circuit, allows you to better understand cash inflow and outflow cycles. This approach ensures you always pay your suppliers and staff on time.

This calculation involves three elements: the supplier payment period (DPO), the customer payment period (DSO) and the stock turnover ratio.

How to manage a cash flow deficit?

You can arrange a cash advance from your bank and repay it as soon as the situation improves. Depending on your company’s working capital needs, an authorized bank overdraft may also be a temporary solution.