How Can I Predict Cash Gaps?
Potential cash gaps can cause business owners serious headaches. Yet it is possible to identify a cash gap before it happens – and to use this information to take action to avoid any major disasters.
While future cash gaps may be hard to predict, planning for a deficit is key to your business’s survival. With a proactive approach, it is possible to plan ahead to help your business become more resilient and sustainable for now – and for the future.
What causes cash gaps?
Traditionally cash gaps are caused by a range of factors, including losing a major client or getting paid late, for example. Such shortfalls can disrupt your business’s daily trading activities, not to mention cause a certain degree of stress.
Andrew Dobbie, Managing Director of MadeBrave, shared his own approach to managing cash gaps when we caught up with him recently.
“The agency model is typically very spiky, with projects coming in and out at different times. It can be hard to predict the future, the world changes daily and different things affect the market place. You never know when a client might pull a project. So build a robust cash flow […] so that when things happen you’re set up for success,” said Andrew.
Currently, the COVID-19 crisis is bringing a cascade of further cash flow issues to businesses across the globe. From local and national lockdowns where businesses are forced to temporarily close, to unpaid invoices from struggling suppliers, the pandemic poses a serious threat to many businesses’ financial health.
If your business’s cash drops below a certain threshold, you may struggle to pay bills, wages or buy essential items. How far into the red can your business go before you hit crisis point?
How can I spot cash gaps?
Preparing for upcoming cash gaps requires a proactive approach. Using a cash flow forecast you can better understand your current and future cash position. With a detailed, up-to-date forecast you can spot cash gaps before they happen.
Using Float’s scenario planning feature you can spot a cash gap within minutes by adding potential ‘what ifs’ to the future timeline of your business. For example, what if our key client’s business is affected by a local lockdown and they have to pause their retainer? Simply add the details into a scenario layer, and you’ll see how a paused retainer could affect your overall business cash flow.
What if the client doesn’t want to fully pause the retainer but decides to reduce it? Not a problem – you can duplicate the scenario you just created and adjust their retainer to a reduced amount to see the effect on your cash flow.
Once you can see the impact this will have on your cash flow, you can take swift decisive action to avoid the disruption a cash gap could have on your business.
Scenario planning is a secret weapon to help your business make decisions based on real data, rather than a panicked, knee-jerk reaction. Planning now can help you keep a cool head if the proverbial does hit the fan.
How to deal with cash gaps
Now you know there’s a cash gap ahead, how can you deal with the impact on your bottom line?
The two areas to consider are cash inflows and outflows. Most businesses facing a cash gap will either seek funding to deal with the shortfall, or cut spending as a short term solution to their cash problem.
Popular funding options include crowdfunding, peer to peer lending and invoice financing. It’s also worth investigating what COVID-19 related grants and loans may be available to your business.
In terms of outgoings, look at what your committed outgoings are, what your savings will cover and what payments could be put off i.e. a payment holiday from a bank loan, for example. Many businesses will look to tighten up their accounts payable and their credit control functions to deal with any forthcoming cash gaps. You can use Float to better understand any overspending that’s happening in your business too.
Cash gaps need not send your business into a crisis or cause undue stress. Instead, taking a proactive approach to cash flow planning can help your business stay buoyant, even when there are rough seas ahead. Try out Float for free today.