The Cash Gap: Identifying and Eliminating It

By Samantha Hadley

The cash gap exists in all small businesses. It is the time between you paying for your product or materials and the customers’ payment clearing into your bank account. For many small businesses this cash gap could extend from 30 to even 90 days. During that time, businesses are financing the money through lines of credit, credit cards and business loans.

A cash cap can costs a business a portion of their profit. In small business, profit is the only thing fueling you and the businesses growth. This is especially true for businesses that do not factor the cost of money into their profit margins.

“Most companies figure the price of their product like this: (material cost + Labor + selling cost + overhead + profit = Price)” said Nate Thorne of CFO On Call, LLC. Unfortunately this figure does not factor in the cost of financing over time. Although this cost is small on a monthly or daily basis, it adds up over the year.

Over time this cash gap can bleed a business dry. Thorne created his business to offer this kind of advice to small business owners. So far he has found many businesses that are having trouble can begin there, internally in fixing their finances for the future.

How to Calculate Your Cash Gap

Day one will be the day your cash goes out, this is when you pay your supplier for the product. Add the amount of days for the product to reach the customer. Then add the amount of days you provide for your customer to pay you. Your total is your cash gap. (Also illustrated in the picture.)

If your cash gap is 30-days and you are paying 2 per cent per month on your line of credit, over the course of one year, your cash gap is costing you up to 24 per cent of your yearly profit margin.

Eliminating the Cash Gap

As a small business owner there are various ways you can reduce or eliminate your cash gap.

  • Set-up credit terms with your suppliers.
  • Offer cash discounts for customers that pay immediately upon receiving the goods or service.
  • Be proactive in your receivables, if your customer has a 30-day term, contact them at the 15-day mark.
  • Use financing programs that offer you more time, such as charge cards with longer payment terms that are interest free.
  • Take deposits on goods and services to limit the amount of funds you are financing over the period of your cash gap.
  • When pricing products or services, factor in the cost of financing money over time.
  • Develop a partnership with a 3rd-party financier so you get your money sooner and the financier worries about the customers payments.

The cash gap can be detrimental to a small business.

‘When the cash gap is properly managed, a business will make a profit,” Thorne reiterated. Look internally, as well as externally and be proactive in tracking, managing and reducing your cash gap.

Via: Business Finance Store

(CFO On Call UA-38359200-1)