Often businesses will experience cashflow problems and that is because of the Cash Gap. Simply the Cash Gap is the time between the business paying for the material and labour to do a job or in retail/wholesale the time between paying for the stock and wages or in service businesses the time between providing the service and in each of these cases being paid by the customer/client.
Basically, your business is acting as the bank for some of these customers or clients who take their sweet time in paying you.
Below this post is a visualization model to better understand the Cash Gap.
Inventory/materials arrives at day 0 (zero) but is not shipped or sold or there is labour involved and not invoiced to the customer/client until day 60. However, in the meantime the business has paid for the materials/inventory and any associated wages in the first 30 days. Once the invoice is issued you may have to wait 60 days for payment. The time between the business paying the bills and receiving payment for the goods or services you provided is the Cash Gap (90 days) and usually the Cash Gap is financed by the bank with a businesses operating line of credit, which the business is paying interest on that LOC.
Here s how you can reduce the cash gap.
- Secure a Deposit – Have your customer or client put down a deposit that covers the labour and material costs.
- Manage your Receivables – In other words have a proactive process to collect receivables that are over 30 days. Yes, I get it no one likes doing this, but the squeaky wheel gets the grease. There are strategies you can use that are not overly aggressive but delivers results in getting invoices paid.
- Negotiate Supplier Terms – Depending on your supplier and the volume of the material you are purchasing; you may be able to negotiate better terms with your supplier. When working in wholesale distribution, we would often use this tactic for suppling long term projects.
- Inventory – There are several strategies you can use with inventory. Right size your inventory for the market conditions. Increase inventory turns. Or JIT (just in time) inventory. That is where you can reasonably predict the flow of certain inventory item turnover. View your inventory as CASH sitting on the shelf or on a rack.
- Change Vendors – Work with vendors that act more like a partner in mutual success rather than just a supplier that dumps product on you and then won’t work with you.
This is just a quick overview of some strategies to reduce your Cash Gap and improve your cashflow. If you would like to discuss your particular situation, we offer a complimentary 1-hour meeting in which we could discuss your business Cash Gap situation. https://www.bigbizgrowth.com/contact