A cash flow gap occurs when a company does not have enough available money to make a payment when it is due, even though receipts are expected later. In construction, the risk is especially apparent because of supplier deposits, payments tied to work stages, customer delays, and several projects running at once.
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What is a cash flow gap in simple terms?
A cash flow gap is a temporary mismatch between the timing of receipts and payments. For example, a customer is due to pay for a completed stage in ten days, but the crew’s wages and a supplier’s invoice are due today. The project may be profitable, yet there is not enough available cash on the required date.
To assess the situation, distinguish actual money in bank accounts from calculated project balances. In a hypothetical example, the company has RUB 1,000,000 in its accounts, while another project has a calculated balance of −RUB 500,000. You cannot simply add these figures and call the result available cash. First check expected receipt dates, mandatory payments, and the purpose of the funds allocated to each project.
Why do cash flow gaps occur in construction companies?
The cause is usually a mismatch in cash flows. A planning error is only one possible factor. A gap can also arise from late payment, unplanned work, higher material prices, or several large payments falling due at the same time.
Payment after completion of a work stage
A contractor may pay for materials and the team’s work before receiving money from the customer. Advance payments or staged payments reduce the working capital needed if those terms are agreed in the contract and the customer pays on time. They do not guarantee that a gap will never occur, so payments still need to be planned.
Excessive fixed commitments
Rent, salaries, subscriptions, and equipment servicing require regular payments regardless of current receipts. It helps to distinguish fixed and variable costs to see the minimum amount the company needs each month.
Using project funds for other purposes
If funds are reallocated without checking the remaining balance and when obligations fall due, the original project may not have enough money on its payment date. Decisions to transfer funds should therefore follow a review of each project’s balance and upcoming payments.
Customer delays and unplanned expenses
Even a carefully prepared plan changes when a customer postpones payment, a supplier requires an advance, or extra work arises on site. These situations call for a cash reserve and an agreed course of action.
What should you do if there is not enough money on the payment date?
First establish the size of the shortfall and how long it will last. Then list mandatory payments and expected receipts by date.
- Check actual balances and obligations. Reconcile bank accounts, cash on hand, funds held by accountable persons, and calculated project balances.
- Clarify receipts. Contact customers and confirm the amount and realistic payment date. Do not count unconfirmed receipts as available money.
- Set priorities. Separate payments that must be made from those whose due dates can be postponed by agreement with the other party.
- Agree on changes. Discuss an extension, instalments, or a partial payment, and document the agreement.
- Assess external financing. Before using an overdraft or loan, compare the amount and duration of the shortfall, interest, fees, approval conditions, and the source of repayment. Borrowing is justified only when the company understands the full cost and how it will repay the money.
Transactions recorded in 101 help you monitor the current position of projects, the Company Fund, and funds held by accountable persons. Future shortfalls are assessed separately by arranging expected receipts and payments by date in a payment calendar.
How can you reduce the risk of future cash flow gaps?
Maintain a payment calendar
Record expected receipts and payments with dates, amounts, and responsible people. Update the forecast when the customer, supplier, or work schedule changes. This helps you identify a shortage before a payment falls due and choose a response in advance.
Keep project funds separate
Track each project’s income, expenses, and obligations separately. When money moves between projects or between a project and the Company Fund, record the actual transfer. An internal accounting entry does not replace the movement of money through a bank account.
Assign responsibility for recordkeeping
Assign responsibility for recording transactions on time, providing supporting documents, and reconciling funds held by accountable persons. 101 records actual transactions and their participants, so data must be entered and checked according to the company’s procedures.
Control your cost structure
How often a payment occurs and how costs depend on the volume of work are different characteristics. Instead of simply relabelling a fixed cost as variable, consider whether the contract or payment model can change, then compare the total cost, supply reliability, and risks.
Build a cash reserve
Set a target reserve based on mandatory expenses and the delays your company actually encounters. The Company Fund in 101 helps maintain management records of these funds. Record actual additions to the reserve as separate transfers and reconcile them with the bank balance; access to the section depends on the subscription plan and user permissions.
Regular recordkeeping, a payment calendar, and checks of each project’s obligations help you make decisions before payments fall due and reduce the risk of another cash flow gap.