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Cash outflows and inflows rarely, if ever, occur at the same time. More often than not, cash inflows lag behind your cash outflows, leaving your business short of money on occasion. Think of this money shortage as your cash flow gap. The cash flow gap represents an excessive outflow of cash that might not be covered by a cash inflow for weeks, months, or even years. Any business, large or small, may experience a cash flow gap from time to time it doesn't necessarily mean the business is in financial trouble. Preparing a cash flow budget is the best way of predicting the cash flow gaps for your business.
Some cash flow gaps are created intentionally. That is, a business will sometimes purposefully spend more cash to achieve some other financial results. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business. For other businesses, cash flow gaps are unavoidable. Take, for example, a business that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season.
Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available for your business.