Surviving Cash Shortfalls (2024)

FAQs

How do you cover cash shortfalls? ›

Methods to resolve a shortfall include loans, equity injections, and improved cash management procedures. Temporary shortfalls can be mitigated by using hedging strategies to reduce the impact of adverse price movements.

Cash shortfall charges refer to the fees or penalties imposed by banks or financial institutions when an account holder fails to maintain a minimum required balance or adequate funds in their account to cover a transaction or withdrawal.

If there's a shortage or overage, a journal line entry is recorded to an over/short account. If the petty cash fund is over, a credit is entered to represent a gain. If the petty cash fund is short, a debit is entered to represent a loss.

When a financial obligation creates a situation in which there are not enough funds to cover the obligation it is considered a shortfall. A shortfall may be unexpected as a result of a current situation, or it can be a predicted event that will occur in the future.

How do companies deal with cash deficits? ›

Cash deficit companies must find creative ways to extend payables, especially when their A/R is less than A/P. Ways to extend accounts payable are: Optimize vendor selection process by negotiating buying terms to longer payment terms or find opportunities for better pricing.

Finding a flexible line of credit that gives your business quick access to funds as and when they're required could be a simple way to ride out a cashflow storm. Short-term business loans, company credit cards, overdraft facilities and invoice finance can all provide quick access to cash.

The Bottom Line

Build up your emergency fund, pay off your high-interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score.

Shorten payment periods for customers

If your customers pay by invoice and you give them a long time to pay, this can lead to a cash shortage because you have to wait longer for your revenue. If possible, encourage your customers to pay in advance rather than on account.

The petty cash must be secure

Further, a person (someone from the finance team) may be responsible for holding the keys, opening the lock box, and maintaining the record of the petty cash. Such an arrangement keeps the money safe and improves accountability.