A business can report a profit and still struggle to pay its bills. Managing cash flow means understanding when money will actually arrive and when payments must be made. These practical steps can help small businesses plan ahead and avoid unnecessary pressure.
1. Understand where cash comes from and goes
The risk: Sales figures can give a misleading impression of available cash. Customers may pay weeks after an invoice is raised, while wages, rent and tax payments fall due sooner.
What to do: Track money received from customers, loans and capital introduced separately from money paid to suppliers, staff, lenders and HMRC. Distinguish cash received from sales invoiced, and remember that borrowing increases cash but is not trading income.
2. Prepare and update a cash-flow forecast
The risk: Unexpected shortfalls can arise when businesses plan around annual profits rather than the timing of receipts and payments.
What to do: Prepare a rolling forecast showing expected opening bank balance, cash receipts, payments and closing balance for each week or month. Use realistic customer payment dates, regular costs and known one-off expenses. Include VAT, PAYE, Corporation Tax or Self Assessment payments where relevant, together with loan repayments and seasonal fluctuations.
For example, a business expecting £8,000 of receipts and £10,000 of payments in a month needs £2,000 of opening cash simply to avoid a negative closing balance, assuming all those amounts occur as forecast.
3. Manage invoices and customer payments
The risk: Late invoicing and overdue customer balances can leave a business short of cash even when it has plenty of work.
What to do: Invoice promptly with clear payment terms, check outstanding balances regularly and follow up overdue invoices consistently. Consider deposits or staged payments for suitable work. Early-payment discounts may help in some cases, but assess their cost before offering them.
4. Plan supplier payments and stock purchases
The risk: Paying suppliers before customer receipts arrive, or buying too much stock, can tie up working capital.
What to do: Agree realistic supplier terms, schedule payments to meet due dates and avoid unnecessary late-payment charges. Review stock levels and slow-moving items. Do not delay payments beyond agreed terms simply to improve the bank balance.
5. Keep a sensible cash buffer
The risk: A single unexpected expense or delayed customer payment can disrupt essential operations.
What to do: Build reserves where affordable, review upcoming commitments and consider appropriate funding early if a forecast identifies a gap. Borrowing and invoice finance involve costs and risks, so compare terms carefully. Business cash needed for near-term bills should remain readily accessible rather than being exposed to investment risk.
How an accountant can help
Johnson Accountants can help small businesses review bookkeeping records, understand cash-flow trends, prepare forecasts and identify upcoming tax and payment obligations. A forecast is an estimate rather than a guarantee, but regular updates can support better decisions.
For further information about the accounting and financial support available, see our accountancy and tax services.
If you would like to discuss your business cash flow, you can book a meeting with Johnson Accountants.
This article provides general information and is not a substitute for advice tailored to your circumstances.
