Cash flow management and the receivables gap

13 November 2018

Bridge the gap with trade credit finance

One of the main challenges for many small businesses – especially among those in the early phase of their growth – is cash flow management.

When cash outgoings exceed cash income, that can mean potential cash flow problems down the track, by anybody’s accounting. But what if the books show increased sales and everything points to impressive business growth, and there are still insufficient funds? What’s happening? Chances are the company is facing ‘the gap’ – the receivables gap.

What is the receivables gap?

To attract and keep customers, a business might offer generous payment terms, extending the collection period and essentially providing goods or services on credit. It’s a strategy that has its benefits, and can boost overall revenue. But when businesses allow 30, 60 or even 90 days before the full amount is due, the gap between the delivery of goods or services and payment on the invoices starts to open up.

And what about accounts that are aren’t paid until well past the invoice date? The pile of ‘accounts receivable’ mounts higher every day, and there’s still no cash in sight.

This is the receivables gap. Add payment-processing time and the gap widens even further.

For some businesses, slow payment might be a constant concern throughout the year, or some months could be particularly problematic. Either way, the question of cash flow becomes crucial.

The dangers of the gap

A widening receivables gap can present some inherent dangers to the growth of a small business.

  • Opportunity cost:

The provision of goods and services involves expenses. Without sufficient and readily available funds, a business might be reluctant to maintain a stock of the raw materials and products it needs to service customers. As a result, the business isn’t well positioned to take advantage of potential new opportunities and seize every chance to achieve more sales.

  • Interruption to the supply chain:

It’s the domino effect. If a business doesn’t receive payment from customers it will struggle to pay its suppliers. This can ultimately damage the relationship, and delay subsequent orders, further risking a loss of business.

  • Barriers to growth:

Uncertain or irregular cash income reduces confidence in terms of expansion or diversification – particularly if the business isn’t monitoring its collection periods to detect seasonal patterns.

How to bridge the gap

Businesses may try to bridge the gap in different ways.

Some use late payment penalties, but these don’t generally promote better business relationships. Online payment options might keep customers happy and shorten the payment cycle. It’s also possible to shorten the collection period but, to remain competitive, many SMEs need to continue offering flexible credit terms to their customers.

There are better ways.

Business operators can look after their customers and also take care of their own business. They know it’s wise to ‘mind the gap’ and they use cash flow or trade credit finance to do it.

Approximately 74% of Australian SMEs rely on some form of external finance, and an increasing number are willing to approach non-traditional lenders for business finance options.

There are clear advantages:

  • It’s fast: non-bank lenders offer quicker turnaround times, and the business receives funds, deposited directly into their accounts, often within 24 hours.
  • The process is efficient and convenient.
  • Finance solutions can be flexible enough to meet a range of different business needs.

GetCapital has developed a trade finance alternative called Shift Payments precisely to solve this problem. With Shift, you get paid on time, every time, and your customers get better, more flexible trade terms. It’s a win-win for both.

GetCapital also offers a broad range of additional business finance solutions up to $750,000, like Business Overdrafts, Working Capital facilities and Term Loans.

Business doesn’t have to slow down when customer payments do. Minding the gap with a business loan can guarantee a steady cash flow when it’s needed most.

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