Cash flow is the movement of money in and out of your bank account. Profit and cash are not the same: a profitable business can still run out of money if customers pay slowly, stock builds up or large bills fall due at the wrong time.
Good cash management comes down to two things: knowing what is coming in and going out over the next few months, and keeping costs under control so there is a buffer when things do not go to plan.
Why profit and cash differ
Your profit and loss account records income when it is earned and costs when they are incurred. Your bank balance only changes when money actually moves. The common gaps are:
- Sales invoiced but not yet paid.
- Stock and work in progress paid for but not yet sold.
- Loan repayments and equipment purchases, which leave the bank but do not appear in full as a cost.
- VAT, PAYE and corporation tax collected or accrued now but paid later.
- Dividends and drawings, which do not reduce profit but do reduce cash.
Forecast cash, not just profit
A rolling 13-week cash flow forecast is one of the most useful tools for a small business. It lists expected receipts and payments week by week and shows the projected bank balance. Update it each week with actual figures and roll it forward.
As an example, a business starts a month with £40,000 in the bank. It expects customer receipts of £85,000, wages and PAYE of £48,000, supplier payments of £30,000, a quarterly VAT payment of £18,000 and rent of £6,000. The closing balance would be £40,000 + £85,000 - £102,000 = £23,000. If the largest customer pays £20,000 two weeks late, the balance drops to £3,000 at its lowest point. Seeing that in advance gives you time to chase, delay a discretionary payment or arrange a facility.
Speed up what comes in
- Invoice promptly, ideally on completion or delivery rather than at month end.
- Set clear payment terms and state them on every invoice.
- Offer easy payment methods, including card and direct debit.
- Take deposits or stage payments on larger jobs.
- Chase overdue invoices consistently, using automated reminders where possible.
Control what goes out
Review regular costs
Go through your bank statements line by line at least once a year. Subscriptions, insurance, phone contracts and software licences tend to accumulate and renew without anyone checking whether they are still needed or competitively priced.
Separate fixed and variable costs
Fixed costs such as rent and salaries stay the same whatever your sales. Variable costs rise and fall with activity. The higher your fixed costs, the more sales you need to break even and the more exposed you are if sales fall. Think carefully before committing to new fixed costs.
Use the credit you have agreed
Paying suppliers on the agreed date, not early, helps cash flow. Paying late damages relationships and can attract statutory interest and compensation, so the aim is to use the terms you have agreed rather than stretch them.
Plan for tax
Tax bills are predictable but often catch businesses out. Moving VAT, PAYE and an estimate of corporation tax into a separate account each month means the money is there when it is due. If a tax bill cannot be paid in full, contact HMRC about a Time to Pay arrangement before the deadline.
Build a buffer
Aim to hold a cash reserve that would cover a set number of weeks of fixed costs. The right level depends on how predictable your income is, but having a target makes it easier to decide how much can safely be taken out of the business.
What to do
- Set up a simple 13-week cash flow forecast and update it weekly.
- Review aged debtors every week and chase anything overdue.
- List all recurring costs and cancel or renegotiate anything not earning its keep.
- Put tax money aside in a separate account each month.
If you would like help building a cash flow forecast for your business, book a free call.
