What is a temporary cash gap? Cash gap: calculation formula

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-17 18:37

Any functioning organization conducts its activities according to certain rules. The work process involves the acquisition of raw materials, energy resources, the sale of products, as well as the receipt of payment from consumers. Ideally, all transactions should be made evenly, but in some cases there may be a delay - a cash gap.

More about the situation

Sometimes operating cycles do not coincide with financial actions, when consumers have not yet paid for the purchased goods, but it is already necessary to order raw materials for another batch for this same money. Such situations are typical for the activities of not only small, but also large organizations.

One should not think that a temporary cash gap is the result of incorrect work of managers or accounting miscalculations. Most often, its causes are quite objective. Leaders, however, have a duty to keep such occurrences to a minimum.

Main causes of occurrence

Delays between work processes can be caused not only by internal, but also by external factors. They are equaldegree can affect the functioning of the enterprise. However, external circumstances are much more difficult to predict.

The main causes of cash gaps are as follows:

• license revocation and other force majeure situations that have arisen in the serviced bank;
• changing the address of an organization requiring re-registration with various authorities;
• transition to another taxation system that cancels or includes VAT payment;
• unoptimized work practices;
• hiccups by debtors;
• difficulties with exports as a result of sanctions or other prohibitive measures;
• complication of legislation in the country.

You can list many more circumstances that can lead to pauses between current processes. However, in most cases they are due to receivables.

Appearance risk management

Business leaders should always think about how to avoid cash gaps in the process of doing business. Risk management is based on general principles and includes the competent distribution of sales markets, expanding the range of products, insurance and minimizing negative consequences. Documents must be prepared in a mandatory manner, providing an opportunity to raise the necessary funds in the event of delays.

Sometimes organizations issue a certain amount of securities issued in the name of trusted persons. In some cases, special contractscessions that allow the transfer of claims for certain obligations. Copies of the listed documents are usually certified by a notary. They may be useful for providing banking institutions for financial monitoring purposes.

To prevent a cash gap from occurring regularly, you should carefully consider the terms of the signed contracts. It is desirable to provide for the possibility of prepayment and prescribe the terms of payments until the end of the previous month. A useful tool can be a bank deposit with the possibility of early disclosure. To diversify the risk, it is advisable to open a current account in another bank.

During regular work with the balance sheets of companies, counter-obligations are often revealed. A rational solution would be to partially repay them so that they can be used as an effective tool in case of delays. They can be used to attract resources as quickly as possible.

Features of detection

Without an idea of how to determine the cash gap, it is impossible to effectively conduct work in the enterprise. To avoid such processes, it is necessary to carefully analyze cash flows and find vulnerabilities. If at the very beginning of the production cycle there is a negative balance, then we can say that an unpleasant moment has come.

You also need to examine the range of goods in the warehouse. If their share covers the subsequent supply, then the situation cannot be called critical. However, only for theseindicators cannot reveal a cash gap. The calculation formula is as follows:

OS+DP-PP=KO.

The table provides an explanation of the symbols.

Abbreviation	Description
OS	The total amount of financial flows before the start of operations
DP	Accounts receivable posted
PP	Amount received during the day for the supply of raw materials
KO	Final balance after completion of all operations

This formula must be calculated on all working days to detect delays in a timely manner. If the calculation turned out to be a negative number, then you should think carefully about the first two points in order to block payments to suppliers.

Common Mistakes When Occurring

Many CFOs make the wrong decisions.

1. Short-term loans are issued that do not bring tangible results. But they increase the amount of future payments, since interest is charged on them. Such a strategy can only bring success if there is a clear plan for the development of the enterprise.
2. Huge discounts are made when making advance payments, which in some cases do not cover the production costs incurred.
3. Initialmaterials needed for production are paid at the end of the period, which disrupts the rhythm of the enterprise.
4. Sold portions of existing capital to larger organizations.

Actions during cash gaps

Although many companies have plenty of reserves, it is not always possible to completely protect the company from delays. There is no need to panic in such a situation. The likely consequences of non-payment need to be assessed and allowances for countermeasures to be made.

The following actions can be taken to prevent a problem situation.

1. Suspension of payment transactions for the supply of goods with the sending of letters of guarantee, which will indicate the date of payment.
2. Early opening of a bank deposit.
3. Engaging third parties to pay directly for the company's obligations.
4. Sending written requests to consumers to activate the repayment of the resulting debt.
5. Presentation of securities as payment.

After better times, it is necessary to replenish internal reserves, from which funds were taken during a difficult period. It would not be superfluous to separately note the consumers and suppliers who helped the enterprise. The positive reputation of the organization, the formation of which must be constantly worked on, will help smooth out the negative points.

What are management failures leading to?

In some casesthe cash gap causes an unbalanced movement of financial flows. Sometimes funds are invested in completely different or related business segments within the same category of companies, and this has its own negative effects. In addition, regular provision of resources is not always ideal. It largely depends on the coherence of the actions of leaders.

Often, money is taken from the turnover to invest in a new project, which has prospects for quick profits. Miscalculations on the part of management in this situation threaten organizations whose income is the result of partnerships with a negative position in the business environment.

Alternative solutions

There are completely different ways to cover time gaps. The first of these is to provide trade credit directly to the supplier, and the second is to encourage consumers to pay the invoices issued by the enterprise ahead of schedule.

Holding companies can:

• create a treasury that provides an opportunity to optimize working capital while reducing the loan amount;
• make a centralized purchase of certain categories of goods, saving resources by increasing the volume of supply;
• get an overdraft to cover the missing funds.

Final part

As a guide for beginners, the method of planning temporary cash gaps in the city budget can be taken. It is created in full compliance with Russian legislation to determine the volume of debts formed at certain time intervals.