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The concept of a cash flow gap is very real to many Australian small businesses. In our last article, we explained how business owners can find hidden cash in their businesses – but what if you’ve done that and you still have a cash flow gap?

A study completed by Xero called the Paying Down to Zero survey showed that:

  • Six in ten small businesses would not survive more than three months if all invoices went unpaid. Some 6% of businesses wouldn’t even last a week.
  • Almost half (49%) of businesses said that late payments hinder growth, while 34% can’t purchase more equipment and one in five can’t hire as quickly as they need to.
  • Small businesses said their biggest cash flow concerns due to late payments are the ability to pay suppliers (38%), the ability to pay staff (15%) and declining profitability (24%).

This research shows that the cash flow gap is a real issue in Australia.

What is a cash flow gap?

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The cash flow gap refers to the time interval between the date when a business pays cash out for the inventory or wages, and the date it receives cash from customers for the same inventory and services rendered. The larger this interval, the greater the cash flow gap in your business.

How can business owners identify a cash gap in their business?

Determining a cash gap involves three different financial measurements: the receivables period, days in inventory, and the payables period.

The key to managing your cash gap is to reduce your receivables period and days in inventory and/or increase your payables period. In other words, you want to get cash out of inventory quickly — while delaying payment to suppliers if possible.

Some of the biggest and most frequent contributors to cash flow gaps include accumulation of excess inventory and materials, poor collection efforts, delayed invoicing of customers, and accepting short payment terms with vendors.

Improving your receivables

Make sure your invoice due dates are clearly marked so there’s no opportunity for clients to claim they didn’t know the invoice was due.

Issue your invoices promptly. The longer you wait to issue them, the longer you’ll wait to receive payment.

Try offering a discount for early payment.

Make paying you as easy as possible by offering a number of different options, including accepting credit cards or online methods of payment.

Establish a deposit policy for works in progress, especially for new customers or long-term projects.

Charge a late fee for payments after a certain date.

Have a clear collections policy and make sure you follow through.

Improving your inventory control

If you sell physical products, you naturally have to invest in your inventory and then sell it. But how big is the gap between these two events? The bigger the gap, the more likely you are to experience a cash flow gap.

You could move toward a “just-in-time” inventory system (producing inventory to fulfill orders rather than accumulating stock).

If your supplier offers a discount on products you commonly buy during a particular month, plan ahead and order then. You can also ask for a discount for ordering in bulk, or even shop around to find a lower-priced vendor.

Concentrate on purchase fast-moving inventory – which may mean getting rid of some product lines that are not performing well.

Improving your payables

For the payables period, the best approach is to negotiate longer payment terms with your vendors.

Especially if you’re a startup business, there are a lot of bills to pay: rent, utilities, materials, wages, and tax. But if you’ve got a cash flow gap, you may find yourself increasingly unable to pay your expenses.

Prioritize your stack of bills by due date and pay each one as close to the due date as possible.

Re-negotiate payment arrangements if necessary.

Monitor your growth

If you’re experiencing rapid growth, you’re particularly vulnerable to experiencing a cash flow gap that can have significant consequences. The key risk for a business in this position is a deficit of cash flow and working capital. it's also important to keep an eye on fixed costs as the business grows. If you’re expending a lot of energy buying stock and hiring new employees but not keeping an eye on collecting cash, you may run out of money to continue trading.

Consider finance and outsourcing to plug the cash flow gaps

You may have implemented all the steps above and you’re still experiencing cash flow gaps. It may be time to consider a finance solution, such as an overdraft, a business credit card or invoice finance.

You may also consider outsourcing your accounts receivable to a specialist, who can often collect payment more efficiently. How well does your debtor book perform? In our next article, you’ll find out more about how your debtors are performing and if they need improvement.

If you’re not sure how to plug the cash flow gaps in your business, we offer a free 30 min consultation to assess the best way to improve your cash flow. Contact us now to find out more.