A cash gap is when bills are due but there is not enough money in the bank, even if the business is profitable.
It comes from timing: customers pay later than you pay suppliers, salaries and taxes.
You measure it through the cash conversion cycle and prevent it with a cash-flow calendar, a reserve and payment terms.
Below: what a cash gap is in plain terms, how a temporary gap differs from a structural one, why it happens, how to calculate it with a formula and a calculator, how to see it in advance in a cash-flow calendar, and what to do once it has hit.
The examples use a Spanish SL, with VAT (IVA) and the Spanish tax calendar.
What a cash gap is in plain terms
A cash gap is a shortage of money on a specific day, not a loss.
A company can be making money, yet on Wednesday it has to pay a supplier €40,000 while a customer will transfer €60,000 only in a month. On Wednesday there is no cash — that is the gap.
That is why a cash gap does not show in the profit and loss account: profit is counted by invoice date, the gap by the date money actually arrives and leaves. More on the difference in Revenue, income, profit and EBITDA.
Temporary and structural cash gaps
- Temporary — a one-off dip: a large order that requires buying goods in advance, a season, a quarterly tax payment, two salaries in one month. Within a few weeks the money comes back and the gap closes by itself.
- Structural — built into the business model: customers pay in 60 days, goods sit in stock for a month, and you pay suppliers in 30. Until the terms change, the gap returns every month and grows with sales.
A temporary gap is closed with short-term financing.
A structural one needs different payment terms, less stock or long-term working capital: a short loan only moves the problem forward.
Why cash gaps happen
- Credit to customers. Revenue is booked, but the cash arrives in 30–60 days.
- Stock and prepayments. Goods are bought and paid for but not yet sold.
- Growth. The faster sales grow, the more cash goes into receivables and stock before it comes back.
- Seasonality. Revenue in summer, costs in winter — or the other way round.
- Taxes and contributions on a calendar. In Spain, VAT and corporate tax prepayments are paid quarterly, not evenly.
- Loans and investment. Loan principal and equipment purchases take cash at once but reach expenses gradually.
How to calculate a cash gap: the formula
A structural gap is calculated through the cash conversion cycle — how many days money is locked up between paying a supplier and being paid by a customer:
Cash conversion cycle = Days in stock + Days to collect − Days to pay suppliers
Working capital needed = Revenue per day × Days to collect + Purchases per day × Days in stock − Purchases per day × Days to pay suppliers
Cash gap = Working capital needed − Free cash
An illustrative example: an SL distributor.
Revenue €60,000 a month, purchases €36,000, customers pay in 60 days, goods sit in stock for 30 days, suppliers are paid in 30 days, free cash is €40,000.
| What we calculate | Calculation | Amount |
|---|---|---|
| Cash tied up in receivables | 60,000 ÷ 30 × 60 | €120,000 |
| Cash tied up in stock | 36,000 ÷ 30 × 30 | €36,000 |
| Supplier credit | 36,000 ÷ 30 × 30 | −€36,000 |
| Working capital needed | €120,000 | |
| Free cash | −€40,000 | |
| Cash gap | €80,000 |
The cash conversion cycle is 60 days. If customers paid in 30 days, receivables would fall to €60,000 and the gap would disappear: free cash would exceed the need by €20,000.
Cash gap calculator
Enter your figures: the calculator shows the cash conversion cycle, how much working capital you need and how much you are short.
A temporary gap: a large order and VAT
The same SL wins a one-off order worth €80,000 excluding VAT. To fulfil it, it must buy goods for €50,000 at once — the supplier asks for prepayment. The customer will pay 60 days after delivery. Free cash is €30,000.
- The supplier must be paid €50,000 plus 21% VAT — €10,500, €60,500 in total.
- The company does not get input VAT back straight away: it deducts it from the VAT payable in its quarterly return — form 303 is filed from 1 to 20 April, July and October, and from 1 to 30 January.
- The gap: 60,500 − 30,000 = €30,500 for about two months, until the customer pays.
The order is profitable: its gross profit is €30,000. But without cash for two months it cannot be fulfilled — or salaries and taxes have to be delayed, which costs more.
How to see a cash gap in advance: the cash-flow calendar
A cash-flow calendar is a table of receipts and payments by week for 2–3 months ahead. Unlike a budget, what matters is not the monthly total but the date.
- Start with today’s cash balance.
- Enter receipts on the dates customers actually pay, not the invoice dates.
- Enter payments by date: suppliers, salaries, contributions, rent, loan.
- Add taxes on their calendar: VAT and corporate tax prepayments each quarter.
- See in which week the balance goes negative — that is the gap, and you have time to prepare.
Update the calendar weekly: every late customer payment shows up at once.
The calendar is part of a financial model and management accounting; how to link it to the budget is covered in Financial model calculations and scenarios.
Payment peaks in Spain
- VAT — quarterly (form 303): 1–20 April, July and October; for the fourth quarter, 1–30 January.
- Corporate tax prepayments (form 202) — 1–20 April, October and December.
- Social security contributions for employees — monthly.
- Two extra salary payments a year: under Article 31 of the Workers’ Statute, one of them falls at Christmas. If they are not spread over the year, payroll almost doubles in those months.
- Annual corporate tax (form 200) — in July for the previous year, less the prepayments.
What to do once a cash gap has hit
- Measure its depth and length. How much is missing and for how many weeks — this decides the tool.
- Prioritise payments. Salaries, taxes and contributions first: arrears on them cost the most. Offer suppliers a schedule in advance, not after a missed payment.
- Speed up receipts. Call debtors, offer a discount for early payment, invoice on the day of delivery.
- Use short-term financing. A bank credit line (póliza de crédito) for temporary gaps; factoring — selling customer invoices to a bank; confirming — the bank pays your suppliers and you repay the bank later.
- Tax deferral. The tax agency (AEAT) can be asked to defer a tax debt or split it into instalments under Article 65 of the General Tax Law; small amounts need no guarantee, but deferral interest applies. The request must be made before the payment deadline.
How to avoid cash gaps
- Payment terms in the contract. Under Spain’s late payment law for commercial transactions (Ley 3/2004), the payment term between businesses is 30 days if the contract sets none, and no more than 60 days by agreement. Do not accept “90 days” from a large customer without doing the numbers.
- Prepayment on large and non-standard orders.
- A reserve — usually one to two months of fixed costs.
- Stock matched to sales, not “just in case”.
- Growth within your cash. Before a large contract, calculate how much cash it will absorb before the first payment.
If the gap repeats every quarter, it is not bad luck but the model: look at the cash conversion cycle and the margin.
How many months the company can run on its current cash is shown by runway.
Frequently asked questions
What is a cash gap in simple terms?
It is when bills are due now but there is not enough money in the bank. The business may still be profitable: the cash simply has not arrived from customers yet or is tied up in stock.
What is a temporary cash gap?
A one-off shortage lasting a few weeks: a large order with a supplier prepayment, a season, a quarterly tax payment, a double salary month. It closes by itself when the money comes in and is covered with short-term financing.
How do you calculate a cash gap?
Work out the working capital you need: revenue per day × days to collect + purchases per day × days in stock − purchases per day × days to pay suppliers. Subtract your free cash — what remains is the gap.
How is a cash gap different from a loss?
A loss means expenses exceed income over a period. A cash gap is a shortage of money on a specific day. A profitable company can hit a cash gap, and a loss-making one may avoid it for a while.
What should you do in a cash gap?
Measure its depth and length, prioritise payments, speed up customer receipts, agree a schedule with suppliers and use short-term financing: a credit line, factoring or confirming.
How can you avoid cash gaps?
Keep a cash-flow calendar 2–3 months ahead, hold a reserve of one to two months of costs, take prepayment on large orders and do not accept long customer terms without doing the numbers.
What is the payment term between businesses in Spain?
Under the late payment law for commercial transactions, 30 days unless the contract says otherwise. A longer term can be agreed, but no more than 60 days.
What is the cash conversion cycle?
The number of days a company’s money is locked up: days in stock plus days to collect minus days to pay suppliers. The longer it is, the more working capital the business needs.
Key points about cash gaps
- A cash gap is a shortage of money on a specific day, not a loss.
- A temporary gap is closed with short-term financing; a structural one needs different payment terms and less stock.
- The gap is calculated through the cash conversion cycle: stock + days to collect − days to pay suppliers.
- Only a weekly cash-flow calendar shows it in advance.
- In Spain, the peaks come from quarterly VAT, corporate tax prepayments and extra salary payments.
Sources
- Ley 3/2004 on combating late payment in commercial transactions, art. 4 — BOE.
- Ley 58/2003 General Tributaria, art. 65 — deferral and instalments — BOE.
- Workers’ Statute (RDL 2/2015), art. 31 — extra salary payments — BOE.
- Agencia Tributaria — tax calendar (forms 303, 202, 200) — sede.agenciatributaria.gob.es.
