Cash Gap
From EconWiki
Cash Gap is the difference between when you collect your sales and when you pay your suppliers.This is illustrated below:
http://fileserver4.jpghosting.com/images/cash_gap_b7c1f8e3d90ab00b5d5dbd9203367d05.png
Note that if you are in the service industry, suppliers become wages and inventory becomes work in progress.
Based on the example above, suppliers are paid 30 days after the goods are acquired, the customer is invoiced in 60 days and they then pay their account in 45 days. This would represent a cash gap of 75 days, being the difference between when the customer pays and when you pay the supplier.
To reduce your cash gap and thus improve your cashflow, you have to think about:
- Defer paying suppliers until the due date or re-negotiate supplier terms.
- Reduce the time the goods are tied up in inventory, you should take in consideration to adjust your Inventory regards your own bussiness (e.g: JIT).
- Accelerate your customer collections, you should be taken care of the Current Liabilities Rotation.
- A projected cashflow can also help predict your business’s cashflow gaps, so that steps can be undertaken to ensure the gaps are the least open they can.
--Caronte 04:15, 30 January 2006 (CET)
