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A business can be profitable on paper and still struggle to pay its bills. That is why profit and cash flow are not the same thing.
You might make a £10,000 sale today, but if the customer does not pay for 60 days, that £10,000 cannot yet pay this month’s wages, VAT, rent or suppliers.
For small businesses in particular, understanding cash flow can be just as important as increasing sales. Here are some practical ways to improve it.
- Know exactly what is coming in and going out
You cannot properly manage cash flow without visibility. Maintain accurate, up-to-date records of:
- Money in the bank
- Customer invoices outstanding
- Supplier payments
- Payroll
- VAT and tax liabilities
- Loan repayments
- Regular subscriptions
- Expected future income
A cash-flow forecast can help you see potential shortages before they become emergencies.
The importance of forecasting is reflected in HMRC’s own Time to Pay procedures: in some cases where a taxpayer asks HMRC for additional time to settle tax, HMRC may request a cash-flow forecast covering the relevant period. (GOV.UK)
- Invoice quickly
Finishing the work but waiting two weeks to raise an invoice means you have effectively extended your customer’s credit period before the payment clock has even started. Create a simple process:
Complete work → raise invoice → send immediately → monitor due date → follow up.
Where appropriate, consider deposits, staged payments or payments upfront. The objective is not to pressure good customers. It is to create predictable cash collection.
- Take late payments seriously
Late payment is a significant issue for UK businesses. The government specifically recognises that late payments can damage cash flow, increase costs and make it harder for businesses to invest and grow. (GOV.UK)
Have clear payment terms and follow up overdue invoices consistently. For larger contracts, consider checking payment terms before accepting the work rather than discovering afterwards that the customer’s standard payment period is 60 or 90 days.
Under Schedule 26 to the Finance Act 2021, a first late payment penalty of 2% of the unpaid tax arises where tax is still outstanding at the end of day 15, with a further 2% of the amount unpaid at the end of day 30 added where it remains unpaid at that point.
Beyond day 30 a second penalty accrues daily at an annual rate of 4% of the outstanding balance until the tax is paid or a proposal resulting in a Time to Pay agreement is made. Late payment interest runs on top, at the rate set by Treasury regulations under section 103 of the Finance Act 2009.
The practical message for readers is that the penalty regime rewards early engagement in a very literal way. Approaching HMRC before day 15 and agreeing time to pay protects the position far more cheaply than waiting to see whether the money arrives.
- Separate profit from available cash
Seeing £30,000 in the business bank account does not necessarily mean you have £30,000 available to spend. Some of that money could effectively be needed for:
- VAT
- Corporation Tax
- PAYE/National Insurance
- Supplier invoices
- Payroll
- Loan repayments
Consider maintaining separate reserves for significant tax liabilities. This can prevent the uncomfortable situation where a tax deadline arrives after the money has already been used elsewhere.
- Review costs regularly
Small recurring expenses can quietly build into substantial annual costs. Review:
- Software subscriptions
- Insurance
- Finance costs
- Utilities
- Professional services
- Supplier contracts
- Marketing subscriptions
- Unused licences
But cost cutting should be strategic. Do not remove expenditure simply because it costs money. A service generating £5,000 of additional business should not necessarily be cancelled because it costs £500. Focus instead on return on investment.
- Understand your tax position early
Unexpected tax bills can create major cash-flow problems. Businesses should understand approximately what they are likely to owe before the payment deadline arrives. If genuine difficulties arise, do not simply ignore HMRC.
HMRC operates Time to Pay arrangements in qualifying circumstances for customers who cannot settle a tax liability in full by its due date. Arrangements are based on individual circumstances and ability to pay. (GOV.UK) Late VAT payments can also result in interest and penalties, so early action is important. (GOV.UK)
- Use your accountant throughout the year
Your accountant should not only hear from you when annual accounts are due. Regular management information can help answer questions such as:
Are sales actually increasing?
Which costs are growing fastest?
How much tax should we reserve?
Can we afford another employee?
Why is profit increasing but cash decreasing?
Government guidance for directors specifically identifies cash-flow monitoring and identifying signs of financial distress as areas where accountants can help. (GOV.UK) That is where accounting becomes a business-management tool rather than simply a compliance exercise.
Need help getting control of your business cash flow?
Cash-flow problems do not necessarily mean you have a bad business. Sometimes the problem is simply timing, poor visibility, slow customer payments or insufficient financial planning. Identifying the issue early gives you more options.
Speak to Zak Partnership
If you run a business in Leicester, Leicestershire or anywhere in the UK, Zak Partnership can help you understand your accounts, tax obligations and financial position more clearly.
Whether you are a sole trader, limited company, growing SME or established business, our team can help you build better financial visibility and make informed decisions.
Book your FREE initial consultation with our Chartered Certified Accountants today.
Do not wait for a cash-flow problem to become a crisis. Talk to Zak Partnership and start planning ahead.
