A cash flow gap is measured by the timing difference between incoming and outgoing cash in your business. It is not a profitability issue but merely a factor of timing. Your business may be growing sales with healthy margins but if your incoming payments are mismatched with your payment obligations, then you will run out of cash.
Various factors can cause cash flow gaps; there might be a gap between completing a project or assignment and receiving payment from your client, but you need to pay your staff and other expenses. Staffing companies and those who complete contract work often experience these problems.
Cash flow gaps can significantly impact a business’ ability to cover its obligations, such as payroll. You must keep track of cash flow gaps to identify potential issues or opportunities and properly manage finances.
Late payments or extended payment terms
You might have cash flow gaps due to customer payment issues, which could be for two reasons:
Late payments from customers can unpredictably widen your cash flow gaps. You know that your customer cannot pay you immediately, and you may have forecasted it, but when their invoice is past the due date, you lack the funds needed to cover payroll. To prevent this, you should enforce clear payment terms with customers. Additionally, you should have a system to track customer payments and follow up quickly when an invoice is unpaid.
Extended payment terms can be an excellent way to attract new business by allowing your clients to pay within their means. However, they also become a double-edged sword. While extended terms may offer a revenue boost in the short term, they can also create a widening gap between payments received and out-payments due. This cash flow gap can become unsustainable if you do not have the systems to manage and monitor extended payment terms. You should know the risk associated with offering these and set up processes to ensure regular payments are received. Additionally, you might consider alternative financing options to stay on top of cash flow.
Lack of cash reserves
If you do not have enough cash reserves, it can impact your cash flow. Without that extra buffer, unexpected costs or sudden decreases in income could lead to serious financial distress because there isn’t enough liquidity to cover those short-term gaps. You then have to take out loans or use other external sources of financing to deal with the issue.
Additionally, when cash reserves are low, you will have difficulty investing in growth opportunities, limiting potential earnings and profitability. Therefore, adequate cash reserves are essential for a company’s long-term financial health and stability.
Payroll funding can be a great way for businesses to improve their cash reserves. This funding provides you with access to cash when you need it without putting additional strain on your existing reserves.
Seasonal fluctuations in contracts
It is not uncommon for companies to experience fluctuations in the number of contracts brought on. But, seasonal fluctuations can significantly impact your cash flow. For example, if you are a recruiting business, you might see times each year when your clients do not have as much need for your services, but you still have staff on your payroll that need to get paid during this time. As a result, you need another way to cover these expenses when contracts are low.
Fortunately, there are methods for dealing with seasonal cash flow gaps. If you have cash reserves, you can allocate some of it to support your business through this time. Another way is working with an invoice finance provider to support your business. They will ensure your business has the funds needed to pay your staff if you are waiting on client payments during the off-season. They can also ensure that you do not have to dip into your cash reserves during peak business so that you have the cash to get you through troughs.
Substandard payroll integration and functionality
Payroll functionality is an important part of any business’ operations, and poor systems can significantly impact a company’s financial health and cause unnecessary strain on the business.
You need to pay your employees or contract workers quickly and accurately. However, substandard payroll functionality can make this difficult. If you leverage an outdated or inefficient payroll system, you may find it challenging to keep track of employee hours, apply awards, calculate taxes, and correctly forecast payroll requirements. Lack of integration also creates siloes and makes it difficult to accurately picture the invoices paid and pending and your other business costs.
Business technology integration is key for companies looking to optimise their cash flow. When your payroll management process becomes disconnected across functions, the result can be an inefficient expenditure of resources and lost opportunities for cost savings. Without unified systems, you may find significant gaps in cash flow due to miscommunications and redundant processes taking up budget and time that you could use elsewhere. Also, delays in invoicing will mean delayed payments which will compound the issue.
All of these factors can harm a business’ bottom line and limit its ability to grow. To protect your business from cash flow gaps, you should invest in quality payroll management software that meets the necessary standards for accuracy and timeliness.
APositive can help you close your cash flow gaps
If you are a business that needs to pay staff before receiving payment for work completed, then payroll finance could be the boost your business needs to grow and succeed. APositive has the experience to help you take on this challenge.
Our Payroll Funding solution provides you access to the money stuck in unpaid invoices. We also deliver a tech-integrated back-office solution with outsourced payroll options to remove the administrative burdens of managing it yourself.
