Working capital gap
Working capital gap: The timing difference between cash a business needs for day-to-day operations and cash currently available from operations.
Plain-English Explanation
A business may pay suppliers, wages and overhead before customers pay their invoices. During that interval, cash is committed to the operating cycle even though the related customer receipts have not arrived. The size and duration of the gap can change with collection timing, supplier terms, inventory levels, seasonality and sales growth.
Why It Matters
Mapping the gap helps leaders distinguish a collections, inventory, payment-timing or forecasting issue from a question that may need professional finance review. It also makes the assumptions behind a cash-flow forecast easier to test. The gap itself does not determine whether a facility is suitable or whether funding will be available.
Next Step
Map the expected dates and amounts of operating payments and customer receipts. Record which figures are known, which are assumptions and which need review with your accountant, CFO, broker or another appropriately qualified professional.
Examples
- A manufacturer pays suppliers in 30 days and customers usually pay in 60 days. For part of that period, the business still needs to cover payroll, rent and other operating costs before the related receipts arrive. The practical review is to map the timing and amount of those payments and receipts, then test how changes in sales, margins or collection days affect the forecast.