By katie simpson on February 23, 2015
Tags: Data Collection
We all know that late payments and long sale cycles are bad for business. But, if you're getting paid, what's the real problem? Late payments can create a cash gap for your business, costing you thousands of dollars.
We know that many small businesses fail within the first five years. The Small Business Administration (SBA) shows that one of the main reasons is from insufficient capital. A long sale cycle can lead to a cash flow gap making your access to capital complicated, and undermining your business.
So how does the cash gap happen? A company has to pay out certain things on a regular basis: inventory, employees, and other expenditures. The problem arises when customers pay late. For instance, you may have to pay a technician for a job before the customer pays for the work.
Suddenly, you have to cover the difference either with cash on reserve or bank financing. Bank financing is an option, but can create additional expenses on your business. The longer that time difference? The more you have to pay.
This is how a cash gap eats into your profits. Dollar General, for instance, had a cash gap of 101 days. For each day, it had to finance $6,318,000 to cover their costs. If the company borrowed at 7%, that was a cost of $442,288 each day.
Closing that gap by 5 days would have added over $2 million dollars to their pretax profits.
Even though we have more technology and faster ways to communicate, it's often getting harder, not easier to collect payment. The Georgia Tech Financial Analysis Lab reported that the average time it took public companies to pay their suppliers jumped from 35 days in 2009 to 46 in 2014.
Some publicly traded companies are trying to change this. Over twenty companies, including Apple and Lockheed Martin have signed the SupplierPay pledge. But you don't have to wait for your customers to pay faster.
Cash flow and keeping cash gaps as short as possible is crucial, especially for small businesses. Gaps can lead to businesses taking out loans and debt eating into profit.
There are a few ways you can reduce your cash gaps including more accurate forecasting. For many companies, mobile payments are saving them thousands of dollars and dramatically cutting their cash gap.