James Whitfield
Profit is not the same as cash
You can have a brilliant month on paper and still find yourself unable to pay the wages. That is the strange truth at the heart of cash flow, and it trips up more freelancers and small business owners than almost anything else. Profit is an accounting idea: it is what is left when you subtract your costs from your sales, whether or not anyone has actually paid you yet. Cash is what is sitting in your bank account on a Tuesday morning when a supplier wants paying.
For a sole trader or a five-person limited company, cash is the thing that keeps the lights on. If you invoice a client £6,000 in March with 60-day terms, your accounts might look healthy in March, but your bank balance will not budge until May. Meanwhile, the materials, the subcontractor and the software subscription all want settling now. Understanding cash flow simply means understanding that timing matters as much as totals.
The UK rhythm of money going out
Most small businesses are reasonably good at knowing what they will earn. Far fewer are on top of the regular, unavoidable dates when money leaves. These are the ones that catch people out:
- VAT — if you are VAT registered, returns are usually quarterly, with payment due one month and seven days after the end of the period.
- PAYE — if you employ anyone, including yourself through a limited company, PAYE and National Insurance are normally due by the 22nd of the following month (19th if you pay by post).
- Self Assessment payments on account — 31 January and 31 July, each one half of your previous year's bill.
- Corporation Tax — generally nine months and one day after the end of your accounting period.
- Pension contributions, insurance, subscriptions and lease payments — small amounts that quietly add up to a serious monthly figure.
Write these dates down in one place. A surprising number of cash flow problems are really just calendar problems in disguise.
Build a simple 13-week forecast
You do not need sophisticated software to get a grip on this, though a spreadsheet or the cash flow feature in your accounting tool will do nicely. What you need is a rolling forecast covering the next 13 weeks — roughly a quarter, and short enough that you can be fairly confident about what is coming.
Set it up with a column for each week and rows for money in and money out. On the way in, list each expected payment by client and by date, not by invoice date. Be realistic: if a client habitually pays three weeks late, forecast it three weeks late. On the way out, include everything from supplier bills to your own drawings. Then add a running balance at the bottom.
The value is not in the precision. It is in spotting the week in six weeks' time where the balance dips uncomfortably low, while you still have time to do something about it.
Practical habits that speed cash in
Improving cash flow is usually a matter of small, consistent changes rather than one big fix. These tend to pay off quickly:
- Invoice immediately — the day you deliver, not at the end of the month. A week's delay costs you a week of cash.
- Take a deposit — 25% or 50% upfront is entirely normal for project work and instantly improves your position.
- Shorten your terms — 14 or 30 days rather than 60, and state them clearly on every invoice.
- Make paying easy — bank transfer details, a payment reference and a clear due date. Friction is the enemy.
- Chase politely and early — a friendly reminder three days before the due date works better than an awkward email three weeks after.
- Ask for staged payments — on longer projects, bill at milestones rather than all at the end.
If a client is persistently late, you are within your rights to charge interest under late payment legislation, though often the mere mention of it in your terms is enough.
Ring-fence the money that is not yours
VAT and tax money sitting in your account can feel like yours. It is not, and spending it is the single most common way small businesses get into serious trouble. As soon as a payment lands that includes VAT, move that portion into a separate savings account. Do the same with a monthly estimate of your tax bill.
A useful rule of thumb is to set aside a fixed percentage of every payment you receive — enough to cover VAT, income tax or Corporation Tax, and National Insurance. It stings slightly in a good month and feels like a lifesaver in January.
Warning signs worth acting on
Cash flow trouble rarely arrives without warning. Watch for a growing gap between what you have invoiced and what you have been paid, a habit of using this month's income to cover last month's costs, or a tax bill you can only pay by delaying a supplier.
If any of those feel familiar, act early rather than heroically. Talk to your accountant before the situation is urgent, renegotiate payment terms with suppliers, and consider whether a short-term overdraft or invoice finance is a sensible bridge rather than a sticking plaster. Cash flow is not about being pessimistic; it is about knowing what the next few months look like so you can plan purchases, wages and tax bills with confidence. Get the rhythm right and the rest of the business gets much easier to run.
