Financing the cash gap: how to always be in money?

Cash gap: what is it in simple words

A cash gap is a situation when an enterprise must pay a creditor (one or more) for a delivery, but does not have the funds to do so due to the fact that another counterparty (one or more) has not paid before it when the payment is due.

Or for other reasons. For example - purely technical, when there is money in the cash register (or in a current account), but you cannot use it. So, in the case of a cash register, the cash drawer may simply break down and stop opening. In the case of a current account, the problem may be more serious - for example, the tax office has blocked the account.

cash gap is a situation when the amount of receipts does not cover current payments

But, as a rule, the main reason for the cash gap is still “debt”. When a company cannot pay off its obligations because the obligations to it were not repaid by someone in a timely manner (in accordance with the expected or deadlines established by law or contract).

The word “creditor” in this case should be understood broadly: it is not necessarily another business in the status of a counterparty, but any individual or legal entity to whom the company owes something. The company has accounts payable to it. In turn, those persons who owe the enterprise are debtors. Their debts are the company's receivables.

For example, the role of a “creditor” to whom an enterprise has a debt can be performed, along with counterparties (buyers or suppliers of goods or services):

  • employees of the enterprise - who need to be paid;
  • budget - where taxes and insurance premiums need to be paid;
  • banks - where you need to repay loans (pay current bills and other financial services used by the company).

Not a single enterprise is immune from a cash gap: even large solvent businesses sometimes face a shortage of available funds to pay off current debts.

In turn, the “debtor counterparty” can also be different persons - but, as a rule, these are, in fact, counterparties - buyers of goods and services. Sometimes cash receipts can, of course, be expected both from the budget and from banks for one reason or another - but in the total amount of money that an enterprise should receive, the debt of counterparties - other businesses - usually takes a noticeable lead.

So, the debt of an enterprise to someone is called “creditor” (accordingly, those to whom it owes are called creditors). And someone’s debt to an enterprise is “receivable” (those who owe are debtors). If the deadlines for payment of accounts payable occur earlier than the deadlines for liquidation of receivables, then a cash gap is formed.

The gap can be calculated:

  • in days - during which the company is unable to repay accounts payable;
  • in the amount that remains to be repaid.

As a result of the cash gap:

  • penalties may be charged on the amount of debt (based on the law - as in the case of taxes, or an agreement - as in the case of supplies) - for each day of the cash gap;
  • Penalties may be applied to the enterprise - provided for by law or contract.

The business reputation of the company, of course, may also suffer. But experienced entrepreneurs usually treat non-payments by counterparties due to cash gaps, as a rule, with understanding. Who knows, maybe today’s creditors will have problems too.

At the same time, the cash gap in many cases is quite easy to predict, since its main reasons are quite universal.

Factoring - nuances and varieties

If you want to protect your company from financial risks associated with deferred payment, use factoring - and you will not have to worry about cash gaps and a decrease in turnover due to a lack of necessary funds.

Let's look at the factoring process step by step. Your supplier company sold a product or provided a service to another company (debtor). According to the terms of the agreement, an invoice was issued, which the debtor is obliged to pay on time. The invoice in this case is future revenue, which will become valid at the moment when the debtor company pays it. With factoring, the bank pays this invoice before the debtor, being an intermediary in the transaction - a factor. In addition to resolving payment issues, the factor often also takes on part of the paperwork.

In the Civil Code of the Russian Federation, a factoring agreement is designated as a financing agreement for the assignment of the right to a monetary claim, the main provisions of which are contained in Chapter No. 43 “Financing for the assignment of a monetary claim.” It is worth noting that as of June 1, 2018, the changes specified in No. 212-FZ of July 26, 2017 “On amendments to parts one and two of the Civil Code of the Russian Federation and certain legislative acts of the Russian Federation” came into force.

There are two main factoring options for suppliers of goods and services – factoring with or without recourse.

Recourse factoring keeps the receivables on the supplier's balance sheet, and if the buyer does not pay on time, the factor makes a reassignment, effectively turning the factoring into a loan. In addition to the first amount paid, the supplier will have to pay the factor a commission for his work and use of the money. Recourse factoring is easier to obtain and requires lower commission costs. The recourse factoring option is convenient if you are confident in your debtor and you need factoring solely to avoid cash gaps and maintain or increase trade turnover.

Non-recourse factoring is more like insurance with compensation received. He usually requires a larger amount as a commission, but if the debtor does not pay the invoice, the supplier receives his money in any case, and it does not turn into credit funds. The factor buys the receivables on its own balance sheet and receives payment from the debtor without the participation of the supplier. Non-recourse factoring is an excellent insurance against supplier unreliability or other force majeure circumstances.

What are the causes of cash gaps?

The main reasons for the cash gap can be divided into 2 categories:

  • predominantly internal (due to the actions of the enterprise itself);
  • predominantly external (not directly dependent on the actions of the enterprise).

We can say that in their pure form, “internal” and “external” causes of the cash gap are, by definition, very difficult to identify. The fact is that in any case we are talking about the interaction of the company with certain external players, on whom something always depends. In turn, there are practically no scenarios in which the role of the enterprise itself would be completely excluded. Therefore, the above 2 categories of reasons for the cash gap, one way or another, are legitimately considered using the concept “primarily”.

If we talk about predominantly internal reasons, the main ones can be called:

  1. The most obvious is the presence of excessively large amounts of liabilities of the enterprise .

More precisely, obligations that are disproportionate to the cash receipts (receivables) that should come from counterparties. It happens that a company takes out too many loans: this is a typical scenario for an increase in the volume of liabilities.

  1. Insufficiently effective contract development.

For example, in terms of establishing payment terms for supplies for counterparties-buyers. They shouldn't be too long. Supply contracts must include adequate sanctions for failure to comply with deadlines, so that suppliers do not become complacent, but at the same time do not incur critical costs in cases where they are forced to delay payment.

  1. Ignoring the level of payment discipline of counterparties.

Nowadays, any business has at its disposal a variety of databases of counterparties, where they are ranked by degree of reliability. But it happens that people responsible for signing supply contracts ignore the low positions of their counterparties - and conclude contracts with them on the principle of “just as long as they sign.” A manager who has entered into a contract with an unreliable buyer will receive his bonus, and the company will receive a headache in the form of subsequent non-payments and a cash gap.

  1. Insufficiently effective financial management mechanisms at the enterprise.

It happens that a business entity, in principle, has enough funds - but they are distributed completely unreasonably, and at the right time - when it comes to paying off obligations to “counterparties”, a shortage arises. For example, if cases of optional large-scale expenses are allowed at the same time. Alternatively, simultaneous:

  • transfer of salaries to employees;
  • transfer of contributions accrued on salaries to state funds.

The size of the corresponding contributions reaches about 30% of the salary. Many employers are very tempted: having paid wages, immediately pay off the contributions too - so that in case of something “not being in debt to anyone.” But there is a completely legal reason - to pay contributions not immediately with your salary, but before the 15th day of the month following the billing month. While a situation may arise when the counterparty issues an urgent invoice, for example, on the 10th day of the corresponding month - and the available money is not enough, since the company was in a hurry with the transfer of contributions.

Any large payments must be dispersed, distributed over as long time intervals as possible. This will reduce the likelihood of a cash gap due to a shortage of current financial flows.

One of the criteria for the effectiveness of financial management in a modern enterprise is the automation of accounting and other procedures related to the organization of production. At the same time, depending on the functionality of the automation programs used (as well as on the quality of their application, the levels of such automation may be different). As is its effectiveness.

Automation must take into account the specifics of each business process: its implementation must be carefully considered, regardless of the scale of the enterprise. Otherwise, the costs of its poor implementation may themselves provoke a significant cash gap.

Examples of automation for enterprises in various business areas include the following: EXAMPLE 1, EXAMPLE 2, EXAMPLE 3, EXAMPLE 4, EXAMPLE 5, EXAMPLE 6.

  1. Lack of sufficient reserves at the company.

Or - sources for prompt replenishment of such reserves (for example, in the form of free shares that can be sold at any time). The reserve is the main source of quickly closing the cash gap. Even the smallest company should have one, not to mention medium or large businesses.

It is important to spend reserves wisely. You cannot “spend” the entire reserve down to the last penny to pay off an accidentally arising debt - since there may not be enough funds to pay off “systemic” debts - such as salary and tax debts (unless, of course, we are talking about major reputational risks in case of non-payment of obligations to counterparties) .

As a rule, it is optimal to spend the reserve not on one individual debt, but to “distribute” funds over several debts: in business, a situation is usually more acceptable in which 2 counterparty debtors, who have seen the partial repayment of their debts, will be ready to be patient and not make claims. the company has sharp demands - in comparison with the situation when one counterparty is completely satisfied, and the other has received nothing. The second will necessarily initiate debt collection - which will most likely not be a very profitable (especially from a reputational point of view) procedure for the company.

In turn, predominantly external reasons include:

  1. Technical failures in banking services.

Now this is rare, but such situations cannot be ruled out: it happens that a long-awaited payment is “stuck” during a transfer between banks. Or, as an option, it was blocked “to clarify the circumstances” - if the controlling structures suspected something.

  1. Political events affecting the behavior of counterparties.

A typical example: sanctions, as well as various “anti-monopoly” fines due to the political situation.

  1. Force majeure , in which the counterparty is completely “rated” and verified, became insolvent.

For example, if an emergency occurred at his production site and all efforts and means were devoted to overcoming it.

What are the benefits of factoring?

Factoring is not just insurance against financial risks and a way to avoid cash gaps. When handling this financial instrument correctly, the supplier receives significant advantages:

  • the opportunity to make more favorable offers for clients in comparison with competitors - with the help of factoring you can choose terms and conditions of payment that are more comfortable for everyone;
  • no cash gaps - payment will be received on the day you fulfill your obligations under the contract, and the work of the enterprise will not be at risk of stopping due to late payment;
  • optimized management of financial flows, most relevant for seasonal types of business, when there is a need to raise funds in a short time, and a significant amount of profit depends on this;
  • if the factor takes over the paperwork, you can focus on other aspects of the business, leaving the bureaucracy to the professionals;
  • checking the solvency of debtors - it is in the interests of the factor to check clients and prevent transactions with obviously unreliable companies.

As a rule, the decision to provide or not provide factoring services is made quickly, especially in comparison with lending. The list of required documents may vary depending on the bank, so the best solution would be to contact the potential factor directly for advice.

What are the risks?

Any non-payment of debts can cause both local damage to a specific enterprise and lead to a chain of crisis phenomena in the entire industry. But if we talk about the most modest scale of business, then the main risks for the enterprise will be:

  • shortage of funds for current purchases (since the available capital must be used to pay off debts);
  • shortage of funds for advertising promotion, PR - expense items, without which a business can simply become uncompetitive;
  • loss of trust on the part of counterparties.

One way or another, large, and often medium and small businesses, often cannot avoid cash gaps. You need to be prepared for them. The best way to do this is to try to calculate the probability of a rupture occurring.

The company is considering additional sources of financing and their costs

Loans from founders, bank loans, bank overdrafts, trade loans from suppliers, attracting investors (loans from investors or sale of shares in capital), forms of support from the state, etc. - each of these sources has different costs, terms and procedures for attracting.

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