Managing The Cash Flow Gap | Working Capital Bridge Financing

Cash Flow Gap Management Can Be The Key To Growth And Stability

For this discussion, I define cash flow gap as the difference between the timing of cash inflows and outflows.  For instance, if your supplier terms are 30 days and your customer terms are 60 days, you will have a cash flow gap to fill with some form of working capital financing.

Even if the terms are equal, there could still be gaps or delays between the time an expense incurred needs to be paid and when the revenues related to the incurred expense get collected.

Some operations are fortunate in that they don’t have a cash flow gap at all.  However, in most business cases, there is a need to finance gaps between inflows and outflows on a regular or semi regular basis.

The working capital financing can come in the form of cash from the business itself, an operating loan that is connected to the business bank account and goes up and down as required, shareholder loans, term loans, factoring of accounts receivable, inventory financing, and so on.

For profitable operations, the financing of a cash flow gap is temporary in nature and is effectively bridge financing where the beginning and the end of a cash flow gap is clearly defined.

For operations that are currently unprofitable, the cash flow gap actually creates a longer term liability as the loss position must be covered off from financing for as long as its required for the business to get back into a profitable position and repay the debt.

The keys to managing the cash flow gap are as follows:

  • Work to match up the days outstanding for trade payables with the days outstanding for accounts receivable.  Gaining a few days through closer management will reduce the cash flow gap.
  • If you work on projects, try to match the project costs with the related expenses when negotiating terms and making payments.  If a supplier is aware of the project they are supplying for,  make sure they understand that they will get paid when you get paid.  Suppliers are more likely to work with you on payment delays if they know you are matching the revenues you receive to the project.  In order to make this an effective strategy, make sure you are only working with credit worthy customers that the supplier will be comfortable with.
  • Assess the benefit of payment discounts versus available working capital.  Taking advantage of an early payment discount from a supplier will actually increase your cash flow gap, but this may be worth doing if you have the working capital available and the cost of the working capital is less than the discount you will receive for paying early.
  • Forecast out your cash flow for at least 6 months.  If you’re in a growth mode or in a seasonal business where sales spike, make sure you understand when cash flow gaps will occur, how much capital they will require, and how long they will last.  If you’re going to require more capital than you now have available, you’re going to need some time to secure capital prior to the period of need.
  • Focus on higher margin products and services to offer.  If the cash flow gap is increasing, it may be negatively being impacted by growth in lower margin products and services, or a change in your mix that has lowered your overall margins.  Again, good forecasting and periodic sales review should help identify the size, timing, and duration of cash flow gaps as well as their causes allowing you to take proactive measures to avoid the business being negatively impacted.