Cash gap: how to see the problem before the money runs out

There is profit, and the money is already short

A company can sell goods, deliver a service and end the period in profit, and still have no money on the account on a particular day.

The reason is dates. Money arrives at a different moment than it was earned, and expenses follow a schedule of their own.

Say a business has 500 thousand on the account. In three days it owes staff 300 thousand, four days after that the landlord gets 150 thousand. A large client is due to pay 400 thousand in two weeks.

Across the month the picture looks fine: the receipt covers the outgoings. But inside that month there is a moment when 50 thousand is left and the next obligatory payment is larger than that.

That is a cash gap: the available money is not enough for the payments that have to be made now.

So the answer to whether your business is profitable does not answer a different question: will there be enough money on a given day. The second question needs more than the totals of receipts and payments, it needs their order in time. That imbalance in timing between what comes in and what goes out is what a cash gap is.

Where a cash gap comes from

Most often the problem comes from several money flows living on different schedules.

A client may pay an invoice 30 days after delivery. Salaries are due at the end of the current month. Rent leaves on the first. Tax has its own deadline. A loan follows its schedule.

Each event on its own can be perfectly normal. The problem appears where they intersect.

There are other scenarios too:

• a large purchase has to be paid for before the revenue from selling the goods arrives;
• a client pays late;
• the business grew quickly, and payroll, rent and purchasing grew with it;
• a new location, a new employee or new equipment appeared;
• a large one-off payment turned up that the usual budget never held;
• several obligations happened to land in the same period.

A gap is especially easy to miss when the plan is built by month. There is enough at the start, the end looks acceptable too, and between those two points there can be several days with a negative balance.

So it helps to treat a cash gap not as a problem of one month but as a question about the path money takes over time.

How to calculate a cash gap

The basic arithmetic is simple:

opening balance + receipts − payments = closing balance.

But finding a gap takes more than one total.

You have to walk through the future dates in order, recalculating the balance each time. Any moment where the available money falls below a payment that is due, or the calculated balance goes under zero, is a problem.

For example:

In this example the business is 50 thousand short between 12 and 18 June.

What matters more is that the gap can be spotted before 12 June. You do not have to wait for the bank to reject a payment. It is enough to lay out the sequence of future receipts and payments in advance.

This is why a payment calendar is used to keep an eye on cash flow. It ties operations to specific dates and shows the future balance rather than only the current one.

Why a payment calendar is sometimes not enough

For a reasonably simple situation a calendar can be enough.

In Excel you can list the future payments, put the receipt dates next to them, work out the balance and see the negative figure. That works fine while the number of scenarios and dependencies stays small.

The trouble starts when more than one payment changes.

Say an owner wants to hire three people. That changes the recurring costs. Then they take a loan, add a monthly payment, and six months later decide to open another location.

New rows appear in the calendar. But now you need to know how all of it affects the balance in three months, in a year and in five years, and then compare that version with one where nobody was hired, no loan was taken and the new location opened later.

At that point the task is a different one: not so much keeping a list of payments as modelling the consequences of decisions.

Excel can be used for this as well. But every change has to be carried through the connected calculations by hand. The more rules and scenarios there are, the more places there are to forget.

Look for the gap in the future, not in your banking app

A bank balance answers the question of how much money there is right now.

A cash forecast answers a different one: what happens to that balance next?

That matters most before decisions that change the shape of your costs.

What happens if you:

• hire three more people;
• take a loan;
• open another location;
• raise the rent you pay;
• start overpaying the debt regularly;
• give clients a longer payment delay?

Each of those changes the future path of the money. The result can look perfectly acceptable today and create a problem several months out.

A model like that shows not only the gap but its context: which movements led to it, how much is left before it, which payments sit next to it, and when the situation turns around again after the next receipt.

That is more useful than asking whether there is money right now. You can ask instead: when does it stop being enough under the current conditions?

Turning a forecast into a decision tool

Suppose a company has two options.

The first: hire three people now. Costs rise immediately, and receipts are expected to grow a few months later.

The second: hire later. More money stays now, and the potential growth in receipts starts later.

In an ordinary budget those two options end up as two versions of a spreadsheet. In a model they become two scenarios of the future.

For each of them you can look at:

• the balance at any moment;
• income and expenses;
• debt;
• assets and equity;
• the moment a cash gap appears;
• how deep the gap goes;
• the state of the finances after a chosen period.

This is where a cash gap becomes part of a wider job. You are no longer just looking for a problem, you are testing decisions before making them.

Cashflow: scenarios instead of one spreadsheet

Cashflow builds a model of money movement out of accounts, rules for moving money, schedules, effects and financial goals. The model plays forward in time and a snapshot can be taken on any date.

So in a model like that a cash gap is simply one of the results of the calculation.

You can add future receipts and payments, look at the movement, change one condition and recalculate. And for different options you build separate flows and compare them.

That moves you from asking how to survive a cash gap to a more useful question:

under what conditions does it arise at all?

For financial planning that is a fundamental difference. A problem you can see three months out is still a problem. But you have time to change the decision before the payment date arrives.

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