Why do cash flow gaps cccur: the reasons every entrepreneur recognises

1. Clients do not pay immediately

Most entrepreneurs work according to the system: “invoice today – payment in 7, 14 or 30 days”. This is a common practice in Latvia, especially when working with companies.

But it is exactly these days between “invoice issued” and “payment received” that create the empty period in which urgent payments must be made:

• rent
• taxes
• purchases
• payments to subcontractors

And if the amount is large, the gap is felt immediately.

2. Mandatory payments follow a strict schedule

This is something the entrepreneur cannot change: taxes, contributions, rent, internet, service invoices, contractor payments, salaries. All of these payments have fixed deadlines.

In Latvia, the 20th and 23rd of each month are especially important – deadlines for state reports and tax payments.

The payment date comes according to the calendar, but money from clients may arrive later.

3. Cash flow is not planned

An entrepreneur knows how much they will earn, but not always exactly when the money will arrive in the bank account.

As a result:

• income is planned
• contracts are signed
• work is being carried out

But the dates of income and expenses do not match. This mismatch is one of the main causes of cash flow gaps.

4. Payment for goods or services is received later

A very common situation: the work is completed, the goods delivered, the service provided – but the payment comes later.

The gap between performance and payment may be short or may last an entire month. And during this time, the entrepreneur lives between “expenses now” and “income later”.

5. Rapid business growth

This reason is often forgotten, although it causes the most severe cash flow gaps.

When an entrepreneur becomes more in demand, takes on more orders, and expands operations, expenses increase before income does:

• more materials must be purchased
• advertising costs increase
• new employees or subcontractors appear, who must be paid regularly
• additional workspace may be needed
• logistics and transport costs increase
• equipment, tools or machinery need upgrades

Income from new orders will come later, but investments in these orders must be made now – and often the amounts are significant.

This is why successful business growth often creates a short-term “hole” that is difficult to fill quickly.

6. Unrecorded or forgotten expenses

Sometimes the problem is not major expenses, but many small ones:

• car maintenance
• unconfirmed receipts
• bank commissions
• purchase of tools
• small software subscriptions
• equipment repairs
• fuel expenses
• additional materials

Each of these expenses may seem insignificant, but together they create a substantial burden. And importantly - if these expenses are not recorded properly, profit “on paper” looks bigger than it actually is.

As a result:

• taxes are calculated from an inflated base
• tax payments become higher

So a forgotten receipt creates not only an expense today, but also additional tax tomorrow - making the cash flow gap even worse.

What cash flow gaps lead to

If a cash flow gap occurs once, it is just a part of normal business operations. But if it happens regularly, the business enters a constant state of stress:

• the entrepreneur delays payments and receives penalties
• suppliers lose trust
• a chain of overdue payments begins
• purchases cannot be made on time
• collaboration with subcontractors becomes difficult
• emotional pressure increases
• a sense of instability appears

A cash flow gap affects not profit, but peace of mind, control, and the quality of financial discipline.

Cash flow gaps can not only be understood - they can be prevented.

In the next article, we will take a detailed look at:

• how an entrepreneur can identify risks in advance
• how to stop living “from payment to payment”
• which tools help stabilise cash flow
• which methods really work for self-employed individuals and SIAs in Latvia
• which financial habits reduce the risk of gaps