Cash gaps are ... Definition, calculation features, causes and formulas
Cash gaps are phenomena where there are no funds to finance regular budget expenditures. Despite the fact that this concept has some common features with but the identification of these concepts is fundamentally wrong.
Essence of the concept
The activity of any enterprise consists of financial cycles, which involve the purchase of raw materials and materials, production, sale, payment and receipt of funds and many other processes related to the specifics of the organization. Cash gaps are situations when the financial cycle does not coincide with the operational one. For example, deferred payment of debtors and other similar situations.
The main causes of cash gap
Based on many years of work experience of economists and researchers, it is possible to identify the main causes of cash gaps. Here are the main ones:
- unreasoned policy of the company management regarding the financing of production;
- the bad faith of counterparties who delay payments under contracts do not comply with the agreements reached;
- providing buyers with deferred payment to the detriment of their own interests;
- non-optimized methods of working with suppliers and customers;
- crises in the economy of the industry or the state as a whole, which lead to a decrease in buyers' solvency;
- changes in legislation that complicate the physical supply or movement of financial flows.
A few more significant reasons
Cash gap in the enterprise may be associated with a number of internal and external factors. Speaking of the latter, we can say that they are not directly related to the solvency of the entrepreneur. Those men less, he may have difficulties in fulfilling obligations for the following reasons:
- Force majeure in the bank in which the accounts of the paying company are serviced. For example, a license was withdrawn from a financial institution. It is also possible that on the day of the alleged payment, there may be a failure in the electronicbanking system.
- Changing the location of the enterprise requires a certain time for re-registration. During this period, the financial activities of the entrepreneur are somewhat limited, until all documents are properly executed.
- The transition to a simplified tax system associated with the abolition of VAT. During the transition period, company accounts may be blocked, which may make it impossible to timely repay debt obligations.
Cash gap often arises from the fact that senior managers make strategic or tactical mistakes. As a result, there is an imbalance in the movement of financial flows:
- financing of related activities belonging to one group of enterprises, with insufficient financial resources;
- withdrawal of funds from turnover to finance a new project in connection with an unsubstantiated hope of a quick return on investment (unjustified risks);
- inconsistency of actions of managers in the provision of enterprise resources.
As a rule, cash gaps can not be predicted.This is something like a force majeure that is impossible to predict. But temporary cash gaps are phenomena that can and even need to be predicted to minimize the compensated loss of profit.
To understand the essence of the time gap, it is worth considering a specific example:
- Wholesale base purchases confectionery once a week (for example, on Monday) with payment of goods upon delivery to the warehouse.
- At the beginning of the next week, the goods were delivered in the amount of 500,000 rubles with the simultaneous purchase of a regular customer in the amount of 250,000 rubles.
- The merchant fully paid for the cost of confectionery, but the payment was received only partially from the debtor, which is due to the delay in payment.
- By the beginning of the next week, the company’s account was only 300,000 rubles, which led to a temporary cash gap of 200,000 rubles, due to the inability to fully pay for the delivered products.
The main consequences of the cash gap
Cash gaps are undesirable phenomena for any enterprise. They can entail the following main consequences:
- The imposition on the entrepreneur of penalties associated with failure to comply with payment obligations under the contract.
- A reduction in supply is proportional to a reduction in the amount of payment, which can lead to disruptions in the production cycle.
- The deterioration of reputation in business circles, which complicates the search for bona fide counterparties.
Cash gap: formula
To analyze the scale of the problem and predict the consequences that it can bring, it is important to be able to calculate the cash gap figure. To do this, the entrepreneur will need a payment calendar in which you can find all the necessary data.
Cash gaps are the amount of cash that was recorded at the beginning of the trading day and actual payments made by debtors minus payments to suppliers of raw materials or products. If the result is negative, it means that the entrepreneur should take measures to close the gap and normalize the situation.
How to avoid problems?
Cash gap - this is a situation when due to inconsistencies in the operating and financial flows, an entrepreneur has uncovered debt obligations.This is an unpleasant problem, the consequences of which are not so easy to handle. Therefore, it is recommended to take measures to prevent it. It:
- continuous monitoring of receivables with the adoption of appropriate measures for its timely repayment;
- the accumulation of a base of permanent debtors with a good reputation, which is a kind of guarantee of constant and timely payments;
- adequate analysis of the payment calendar in order to make appropriate adjustments to the work of the enterprise;
- minimizing the use of borrowed resources and commodity loans;
- work to reduce the number of non-operational payments (credit interest, penalties, etc.);
- drawing up a clear calendar plan for the movement of financial flows for the next period, taking into account possible inconsistencies;
- reduction of the frozen assets category (it is important to develop such a system for the procurement of goods or raw materials so that these resources are constantly in operation and not lay in warehouses);
- Improving the qualifications of financial department employees with a focus on developing risk prediction skills.
Elimination of cash gap
Covering the cash gap is the first thing that an entrepreneur should attend to after identifying inconsistencies between financial and operational processes. For this, the following measures can be taken:
- Suspension of mandatory payments. For example, by deferring tax deductions or utility payments. This is useful in the case when the penalty is less than the penalties for non-compliance with the terms of the contract.
- Additional investment. These can be contributions to the authorized capital or the issue of shares with their subsequent sale.
- Factoring and overdraft. In a simplified version, this means the use of borrowed funds (for example, take a loan for a cash gap). A scheme with a loan of an individual and the subsequent transfer of this obligation to the enterprise may be used.
- Restructuring. By agreement with the supplier, it is possible to provide for the extension of the maturity of debt obligations with a decrease in the amount of a one-time payment.
- Payment from buyers. Having regular customers, you can agree with them on making a prepayment on mutually beneficial terms. The company receives funds to pay off the cash gap, and the buyer - a discount on products.
How to optimize receivables
Coverage of temporary cash gaps becomes possible after optimization of the structure of receivables. This approach may include such activities:
- detection of enterprises with a high degree of risk of non-payment of payments and their exclusion from the number of possible counterparties;
- the introduction of a securities system in the redemption of receivables (for example, promissory note);
- development of clear principles for settlements with counterparties for the future and its joint approval;
- planning conditions for the enforcement of overdue payments and fines.
Forecasting and timely coverage of the cash gap is not an easy task, which requires a systematic approach from the manager. Moreover, actions must be not only reactive, but also preventive. It is important to identify possible causes of nonconformities at the very beginning of the production cycle and neutralize them.
To reduce cash gaps need to adhere to an approach that involves the predominant use of the organization’s own resources. It also requires the development of a set of measures for the continuous search for reserves.This will allow early detection of risks and forming a “airbag” to eliminate them.