Profitable on Paper, Skint in the Bank: A Small Business Guide to Cash Flow

Every October I have a version of the same phone call. A client has opened the accounts I sent over, seen a profit figure bigger than last year's, then logged into the bank to pay a supplier and found less than a month's wages sitting there. The question that follows is always polite and always slightly accusing. "If I made all that, where is it?"

Nobody has made a mistake. The report is right and so is the bank balance. They measure different things, and most small businesses only ever look at one of them.

Autumn is when the gap starts to hurt. The final quarter is busy, Christmas bends every payment pattern out of shape and January arrives with a tax bill attached. A business that is going to run short will usually do it between now and February.

The profit that went missing

A profit and loss report records a sale on the day the invoice goes out. The bank records it on the day the customer pays, which might be six weeks later. Costs work the same way in reverse. So the report can show a healthy month while the account it describes is heading for its overdraft limit.

Growing businesses get caught by this more often than struggling ones. More sales means more unpaid invoices, more stock on the shelf and more wages paid before the money for the work comes in. Growth eats cash first and pays it back later.

Five hiding places

When I go looking for a client's missing profit, it is nearly always in one of five spots.

·        Unpaid invoices. The work is done and the sale is counted, but the money is still in the customer's account.

·        Stock and materials, bought and paid for and waiting to be sold.

·        Tax held for HMRC. VAT, PAYE and the tax due on profits all sit in the business account for a while, making the balance look better than it is.

·        Loan repayments and equipment. Paying down a loan or buying a van drains the bank, yet most of it never appears as a cost on the report.

·        Drawings and dividends. What the owner takes out leaves the bank without touching the profit figure.

None of these is a sign of bad management. Every business has them. Trouble starts when nobody is watching how big each one has become.

Thirteen weeks of foresight

The tool I set up for clients more than any other is a 13-week cash forecast. One quarter, laid out week by week, in a plain spreadsheet.

It starts with today's bank balance. Each week gets the money expected in, entered on the date that customer normally pays (rarely the due date printed on the invoice). Then the known outgoings come off: wages, rent, suppliers, loan repayments, subscriptions. Last come the large, lumpy ones people forget, such as VAT, PAYE, Corporation Tax, the January Self Assessment payment and annual renewals.

The closing balance for each week tells the story. Somewhere in the thirteen there is usually a week where payroll, a VAT payment and a big supplier bill land together. Spotted in October, that week is a scheduling problem: move a payment date, chase two invoices harder, talk to the bank calmly. Spotted three days before, it is an emergency.

Once the forecast exists, updating it takes about fifteen minutes a week.

Chasing without the cringe

Most customers who pay late aren't being difficult. They pay whoever makes it easiest and whoever reminds them.

The businesses I see getting paid fastest do boring things consistently. They invoice on the day the job finishes instead of saving it all for month end. Their invoices show the due date as an actual date, because "Due 14 November" gets acted on and "30 days" gets filed. Bank details are on every invoice. Terms were agreed in writing before the work began. And one person has a fixed slot every week for following up anything overdue.

A friendly reminder sent every Tuesday collects more money than a furious email sent in month three.

The account that isn't yours

For a VAT-registered business charging the standard rate, one sixth of every payment received belongs to HMRC. The tax on profits is the same story on a longer fuse. Both sit in the current account looking like spending money.

A second bank account fixes this. Each time a customer pays, a set percentage moves across and stays there. The right percentage varies from one business to the next, and it is something a bookkeeper can help work out. It is the least glamorous habit in finance and the one that most reliably stops a tax bill becoming a crisis.

Count the weeks

One number is worth knowing before Christmas: how many weeks the business could keep paying its essential costs if no money came in. Add up a month of wages, rent, loan repayments and the suppliers you couldn't trade without, divide by four, then divide the cash available by that weekly figure.

There is no correct answer, because a business with steady retainer income needs less cover than one living on large, irregular projects. What matters is knowing the figure and knowing which direction it is moving.

Old numbers tell old stories

All of this relies on books that are up to date. A forecast built on records six weeks old is guesswork, and nobody can chase an invoice they don't know is overdue. That is the part of a bookkeeper's job that gets talked about least. Tidy records are a by-product. The point is figures recent enough to act on.

The clients who make that October phone call nearly always find their profit in their customers' bank accounts and their own stockroom. It takes an afternoon to trace. Tracing it now, with thirteen weeks in hand, beats tracing it in January.

This article is general information, not financial advice. What is right for your business depends on your circumstances.

If you'd like help building a cash flow forecast, or want to know where your own profit is hiding, book a free intro call and let's talk.