A business may face the unexpected when a long-term client suddenly pulls his order or when a client delays his payment, resulting in a cash shortfall. If a business puts contingencies in place to handle such a shortfall, it may be able to cope. If not, the business may find itself with financial difficulties. As a precautionary measure, identifying cash shortfalls on a business's financial projection statement may prevent potential financial problems.
Coming Up Short
When a business does not have enough cash on hand to make payments to its suppliers and does not have sufficient funds for unforeseen emergencies, it may run into a cash shortfall. A business can salvage potential shortfalls with a line of credit or a credit card. Without a cushion to fall on, a business could end up seeking additional capital to make up for the shortfall.
If a company receives $230,000 in cash from its customers in a business day and adds that amount to its existing balance of $42,500, it has total available cash of $272,500. If the company has to make $352,500 payments, however, it does not have enough funds to cover it. The business will be in a position of a cash shortfall of $80,000.
A business can find itself in a cash shortfall and resulting struggle due to a number of circumstances. A drop in sales, delayed payments from clients or unforeseen challenges during a business's start-up phase may cause a cash shortfall. As a result, the business may find itself with the inability to make timely payments, which analysts and investors may interpret as struggling.
A cash shortfall indicates a warning on a cash budget or cash flow projection. Recognizing a potential shortfall can help a business arrange for funds before the problem occurs. This financial warning helps a business act responsibly in managing its working capital.