Every business has a cash gap, which is the difference between payments for goods and services received and cash in hand. This gap is calculated by dividing the average number of days it takes to collect accounts receivables from customers by the average number of days it takes to pay vendors. This shortfall is then multiplied by four.
A wide receivables gap can make it difficult for a business to remain competitive and expand. It is often difficult to get the cash you need to meet payroll, purchase inventory, and cover other expenses. As a result, a business must look for ways to increase sales and reduce cash outgoings. Luckily, there are many options available to help companies manage cash flow.
The first option is to improve inventory turnover. A company with higher inventory turnover will need less cash. While managers are aware of the impact of payables and collections periods on cash gap, operating personnel don’t always understand the impact of their decisions. As a result, a cash gap can have a dramatic impact on a business’s bottom line.
Recourse financing is another option for companies that are struggling to meet their financial obligations. Receivables finance helps bridge this gap, which in turn helps companies make their payments to their customers. It also allows companies to invest in R&D, innovation, and expansion. This method may not be suitable for all businesses, but it can be beneficial for a growing or mature business. So, what are the benefits of receivables financing?
Another way to reduce the cash gap is to increase margins. Increasing sales can increase the cash flow in a company, but it will not necessarily increase its bottom line. A good way to manage a cash gap is to measure it in real time and use it to guide future decisions. If the cash gap is large enough, it can be used to warn a company of potential cash flow problems. If you are growing a company and need more cash, make sure that you have a plan in place.
If you don’t have enough cash to pay suppliers, account receivable financing may help you bridge the gap. This type of financing is available from lenders who collect invoices on behalf of businesses. The amount of money lent varies from $500 to $5 million. In addition, these loans are flexible and can be used even if the business has a tax lien on it.