Quick answer
To manage a cash flow gap, first identify its cause, such as customer payment terms, seasonal sales, stock purchases or tax timing. Forecast how deep and how long the gap will be, then reduce it with non-finance fixes like faster invoicing, deposits, better supplier terms and setting aside tax. If a gap remains, choose finance that matches it: revolving facilities for recurring gaps, invoice finance for slow payers.
Key points
- Find the cause before choosing a fix.
- Forecast the depth and duration of the gap.
- Non-finance fixes often shrink the gap substantially.
- Match any finance to the shape of the gap.
Checklist
- Cause of the gap identified
- Six-month cash forecast prepared
- Invoicing and payment terms reviewed
- Supplier terms reviewed
- Tax set aside in a separate account
- Finance matched to the gap
Almost every business hits cash flow gaps. Money goes out for wages, stock, rent and tax before money comes in from customers. Most gaps are normal and manageable. The ones that cause real damage are the ones that arrive as a surprise, or that get covered with the wrong kind of finance. This guide walks through a practical way to understand and manage them.
Step 1: Find the cause
Gaps have causes, and the cause points to the fix.
| Cause | Typical fix |
|---|---|
| Customers on long payment terms | Faster invoicing, deposits, invoice finance |
| Seasonal sales | Saving in peak months, a revolving facility |
| Stock bought ahead of demand | Supplier terms, trade finance, a line of credit |
| Large one-off cost | Term or equipment finance |
| Growth outpacing cash | Working capital facility sized to growth |
| Tax due dates | Setting aside GST and PAYG as collected |
| Ongoing losses | Pricing and cost review, not more debt |
Step 2: Forecast the gap
A cash flow forecast shows when the gap opens, how deep it goes and when it closes. Start with your bank balance today and estimate money in and money out for each of the next six months, using the dates cash will actually move. The cash flow gap calculator does this and suggests a facility size with a buffer. The business.gov.au cash flow statement guide is another good template.
Step 3: Shrink the gap without borrowing
Before arranging finance, try the levers that cost nothing:
- Invoice immediately when work is done, not at month-end.
- Shorten payment terms for new customers and ask for deposits on large jobs.
- Make paying easy: online payment links, direct debit, card payments.
- Follow up promptly on overdue invoices. Our guide to slow-paying customers has practical scripts.
- Negotiate supplier terms that line up with when your customers pay.
- Set aside GST and PAYG in a separate account as you collect them.
- Trim slow-moving stock that ties up cash.
These changes can shrink a gap significantly, and they keep working long after any loan is repaid.
Step 4: Choose finance that matches the gap
If a gap remains, match the finance to its shape:
- Recurring gaps that close on their own suit a line of credit or overdraft.
- Gaps caused by slow-paying business customers suit invoice finance.
- A one-off gap with a clear end suits a short-term loan.
- Gaps from growth may suit a larger working capital facility.
Step 5: Watch for warning signs
A gap that does not close, or gets deeper each cycle, is a different problem. Signs include using new loans to make repayments on old ones, paying the ATO later each quarter, and suppliers tightening terms. The business.gov.au page on improving cash flow and a conversation with your accountant are the right next steps before any new finance.
Building a buffer for next time
Once through a gap, set aside some cash in good months to cushion the next one. Even a modest buffer reduces the need for finance and gives you time to make better decisions when a gap appears.
An illustrative example
A made-up signage business notices its account dips every quarter. Mapping six months shows the dip coincides with BAS and large supplier orders, while customers pay on 45-day terms. The owner moves larger clients to 50 per cent deposits, starts sweeping GST into a separate account weekly and sets up a modest line of credit for what remains. The next quarter’s dip is shallower and covered without stress.
Reviewing your gap every quarter
Cash flow patterns change as a business grows, adds customers or changes suppliers. Re-run your forecast each quarter, compare it with what actually happened and adjust. Over time you will see which fixes work and how much buffer or facility you really need.
Talking to your bank and suppliers early
When a gap is coming, early conversations are far more productive than late ones. A supplier told three weeks in advance that a payment will be a few days late, with a firm date, will usually accommodate it. A lender asked to increase a limit before the busy season will look at the request calmly; one asked the day before wages are due may not. Even the ATO generally responds better to a business that makes contact and proposes a plan than to one that goes quiet. Your forecast gives you the dates and amounts to make those conversations specific and credible.
Separating timing from profitability
A useful test is to ask whether the business would be fine if every customer paid on the day of sale. If yes, the problem is timing and finance can help. If no, the business is not earning enough to cover its costs, and the solution lies in pricing, costs or volume. Mixing the two up is how businesses end up borrowing to fund losses, which only makes the next gap deeper.
Need help covering a gap?
If you have mapped your gap and still need finance to cover it, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a crowd. Tell us roughly how deep and how long the gap is in your enquiry; that information points straight to the right kind of facility.
Frequently asked questions
What causes cash flow gaps?
Common causes are customers paying on long terms, seasonal sales, buying stock ahead of demand, large one-off costs, growth that requires more working capital, and tax obligations falling due together.
How big a buffer should a small business hold?
It depends on the business, but many advisers suggest enough to cover at least a few weeks of fixed costs such as wages and rent. A cash flow forecast helps set a sensible figure.
Is a cash flow gap a sign my business is failing?
Not necessarily. Many profitable, growing businesses have timing gaps. A gap that never closes, or keeps getting larger, is more concerning and worth discussing with your accountant.
What is the cheapest way to cover a short gap?
Often a line of credit or overdraft used only for the days or weeks needed, because you pay only for what you draw. Non-finance fixes such as faster collections are cheaper still.
Should I pay suppliers late to cover a gap?
Occasionally negotiating extended terms is reasonable, but paying late without agreement damages relationships and can lead to stricter terms or lost supply.
How far ahead should a cash flow forecast look?
Six months is a practical minimum for spotting gaps, with weekly detail for the next few weeks if cash is tight. Many businesses also keep a rolling twelve-month view to plan for seasonal peaks and tax dates.
Sources and further reading
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