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Cash Flow Gap, Cash Balance, and Cash Cycle Essay (Article)

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Updated: Jul 11th, 2020

Cash is king, is it not? However, having cash is not enough. What is more paramount is to develop the mechanisms of managing cash because it is the employment of such tools that makes the business successful and protects it from bankruptcy and negative influence of economic turbulence keeping it afloat. That is why it is crucial to recollect the techniques of managing cash flow in the business.

The Cash Flow Gap?

First and foremost, it is vital to realize that managing cash flow is only significant to avoid what is known as a cash flow gap, i.e. the condition of the business, in which cash outcomes exceed cash incomes (Edwards 5). It is extremely acute in the case of small businesses and start-ups. However, sometimes even big businesses face this challenge, e.g. during the times of economic turmoil. So, understanding these gaps and eliminating them are the primary objectives of cash flow management. This article will present some effective techniques for managing cash flow.

Maintaining Cash Balance

It is always paramount to maintain the balance between cash incomes and cash outcomes. This technique requires a close look at a company’s financial health. The most important thing to realize about maintaining cash balance is that an enterprise should ensure that it has enough funds to continue its operation, and it should be done daily (Moodie 20). This method is often used by small businesses because it is close to impossible to employ in the case of big companies. It is deployed through determining cash burn rate, i.e. being close to negative cash flow. This rate is easy to calculate because it equals average spending during a particular period (Edwards 6).

Down the Path of Accuracy

The easiest and most effective way to manage cash flow is to be accurate. This technique requires maintaining the quality of data, keeping precise records of all business activities, paying bills on time, and correctly addressing invoices (Moodie 21; Akalp par. 8, 10). These steps are simple to follow and are the foundation of workplace and business discipline, but their significance and efficiency cannot be underestimated because they minimize the risk of negative cash flows and the existence of cash flow gaps.

Adapting the Cash Cycle

This technique is highly individual because it implies that every company adapts the length of its cash cycle to its personal needs and interests. It means that business makes the shift from a traditional 12-month long cash cycle to longer or shorter ones to reflect the specificity of its business operations. It should be noted that the focus is made on routine activities. However, there is a set rule for deploying this method: the shorter the cycle, the better because it contributes to more accurate behavior in doing business (Edwards 8).

Thinking Long-Term

This method has two constituents. First, it points to the necessity of forecasting potential economic instability and planning the outcomes of business activities. It is necessary for mapping out expenditures and understanding the volume of resources necessary for successful operation. Second, it includes long-term lending. The idea behind this technique is to reveal as much cash as possible for dealing with current issues even though leasing and long-term lending are usually more expensive (Akalp par. 5, 15).

Conclusion

Knowing how to apply the techniques mentioned above is beneficial for doing business. Of course, they are more applicable to small businesses or start-ups because they often feel a lack of resources. However, keeping them in mind and putting them to practice is always a good idea because even big businesses can be greatly affected by the unforeseen crisis.

Works Cited

Akalp, Nellie. “Small Business Trends. 2015. Web.

Edwards, James B. “Managing the Cash Flow Gap.” Journal of Corporate Accounting and Finance 26.1 (2014): 3-10. Print.

Moodie, Ann-Marie. “Managing Cash Flow in Tough Times.” Charter 79.9 (2008): 20-22. Print.

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IvyPanda. (2020, July 11). Cash Flow Gap, Cash Balance, and Cash Cycle. Retrieved from https://ivypanda.com/essays/cash-flow-gap-cash-balance-and-cash-cycle/

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"Cash Flow Gap, Cash Balance, and Cash Cycle." IvyPanda, 11 July 2020, ivypanda.com/essays/cash-flow-gap-cash-balance-and-cash-cycle/.

1. IvyPanda. "Cash Flow Gap, Cash Balance, and Cash Cycle." July 11, 2020. https://ivypanda.com/essays/cash-flow-gap-cash-balance-and-cash-cycle/.


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IvyPanda. "Cash Flow Gap, Cash Balance, and Cash Cycle." July 11, 2020. https://ivypanda.com/essays/cash-flow-gap-cash-balance-and-cash-cycle/.

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IvyPanda. 2020. "Cash Flow Gap, Cash Balance, and Cash Cycle." July 11, 2020. https://ivypanda.com/essays/cash-flow-gap-cash-balance-and-cash-cycle/.

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IvyPanda. (2020) 'Cash Flow Gap, Cash Balance, and Cash Cycle'. 11 July.

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