All businesses need cash on hand to operate efficiently. You need cash to pay staff, hire new talent, invest in growth and to pay your suppliers. But a lack of cash flow is one of the main reasons why 60% of Australian small and medium businesses shut down in the first few years.

Xero surveyed a range of small businesses in their Paying Down to Zero Survey and found that six in ten small businesses wouldn’t survive more than three months if all invoices went unpaid. And 6% of businesses would not even survive a week!

The cash flow gap slap (because it feels like a surprise slap in the face) is a real issue for too many small businesses. It’s not uncommon to experience periods of cash flow highs and lows, but when your famine periods are considerable, you’ll struggle to pay the operating costs to keep your business moving along.

We see it all too often, that cash flow issues will kill a business much faster than any competition ever could.

What is the cash gap?

The cash gap is the number of days from when you pay for goods and services you have purchased to when you receive receipt of payment for the goods and services when they are sold. The more days between these two occurrences, the larger the cash flow gap is within your business.

It’s common for a lot of businesses to buy inventory and then have those goods sit on a shelf in the business for too long. If you struggle to sell products that you have paid for or clients don’t pay up on time, all of a sudden you can find yourself in a situation of having no cash flow within your business. And without cash your business will struggle to survive.

Fortunately, there are ways that you can manage the cash gap slap and continue to grow your business now and into the future.

Why the cash flow gap happens?

It does not matter how good you are at figuring out your cash flow, there are always unexpected expenses or delays from clients that put you in the position of experiencing the cash gap slap. However, there are strategies and plans you can put in place to help reduce the impact.

A disciplined approach to financial planning and cash flow forecasting gives you the chance to anticipate any cash flow shortages within your business and plug any major gaps before they do damage to your business.

Some of the questions you can ask yourself include:
• Do you have a good understanding of the amount of working capital your business needs to operate?
• Are you managing your inventory well and not holding onto excess stock for extended periods?
• Are you up to date with invoicing and following up any overdue debts?
• Do you have access to funding facilities for your growing business?

In the past it used to be recommended that you have three months’ worth of outgoings on hand for a rainy day. This figure might not be the right amount for your particular business but having some sort of buffer in the bank can help with the sleep at night factor.

If you are holding too much stock currently then perhaps consider offering a discount on a bulk order to help free up some cash. Or review your existing overhead expenses and see if there is any room to cut back where you can.

How to reduce the chance of the cash flow gap

There are a number of ways in which you can reduce the cash flow gap and help to drive your business forward.

Send out invoices promptly

Staying on top of your receivable paperwork is crucial. Consider creating a regular schedule for sending out invoices and automate as much as possible with cloud-based accounting software. Get clear on your payment terms and be upfront in sharing these terms with your suppliers. Ensure due dates are clearly marked so there is no ambiguity at your clients end as to when payment is expected.

Review your credit policies and determine whether you can reduce your payment terms. While this could be tricky for existing clients or customers, for new business it can be a solid approach to improving the regular flow of cash into your business.

Chase late payers

If you can send out automatic payment reminders a few days before an invoice falls due. Then be sure to chase overdue invoices at regular intervals. Sometimes emails can get lost in a busy inbox so combining email and phone calls can see faster payments made.

Offer additional payment options 

Sometimes invoices can become overdue because the other business is also feeling the cash gap slap. If you’ve only ever offered direct deposit payments in the past, perhaps consider offering credit card payments such as Stripe or PayPal to allow payments to be made more efficiently.

And consider offering a discount for early payment and charging a late fee for payments that fall after a certain date.

The key is to get really clear on your collections policy and even more important be sure you follow through on it.

Take stock of your inventory

Are you holding too much stock? Particularly if you sell physical products it’s natural to have to invest in inventory and then hold it to sell. But how big is the gap between these two events? The longer you hold stuck the more likely it is you will experience the cash gap slap.

If you can move closer towards a “just-in-time” system for you inventory than this could help with cash flow. Alternatively

Improving your inventory control

If you sell physical products, you naturally have to invest in your inventory and then sell it at a later date. But how big is the gap between these two events? The bigger the gap, the more likely you are to experience a cash flow gap slap.

You could move toward a “just-in-time” inventory system (producing inventory to fulfil orders rather than accumulating stock) or consider getting rid of some product lines that are not performing well.

Holding a sale to clear out extra stock can also give you the much-needed cash boost you need.

Extend your payables terms

Try to negotiate longer payment terms with your vendors and pay each invoice as close to the due date as you can. If you find yourself in a real cash flow bind, see if you can re-negotiate payment arrangements.

Review pricing

When was the last time you reviewed your pricing structure to ensure you’re not undercharging? Also look at if there are ways you can change how you package up goods and services to increase their perceived value so that you can charge a little more.

Take a look at your overheads

While revenue coming into your business is vital, finding ways to reduce your expenses is another good way to manage cash flow. Now is the perfect time to review your all of your business costs including rent, subscriptions, insurance and supplier costs. With some investigation and negotiation costs can often be reduced.

Don’t stop with your marketing efforts

Don’t take periods of high cash flow for granted and take your foot off the pedalling in filling your pipeline. While it can be tempting to save advertising dollars when things are going well, your future pipeline is essential to reduce the impact of a cash flow focus in the future. Make a marketing plan each year and do your best to stick to it throughout the peaks and troughs.

Get out of the cash gap slap

If you’ve implemented all of the actions above and still have a cash flow gap to plug, then you might like to consider a financial solution such as a short-term business loan for a short period of time.

Short term business financing can mean you have money in the bank in 24 hours to help you execute your business strategy and fill any short-term gaps in cash flow.

For more than five years we’ve helped hundreds of small and medium businesses secure finance to fund real growth in their business. With flexible loans from $5K to $300K, including no hidden fees and highly competitive rates, Smart Advance can help you take the slap out of the cash gap.