Ask the owner of a new business how it is going and you will usually hear about sales. Ask their accountant and you will hear about cash. The difference is not pessimism. It is that a business can sell well, make a profit, and still close because the money arrived later than the bills did.
Managing cash flow is not complicated. It is mostly a handful of habits, set up early and kept up.
Know your lowest point before you reach it
The single most useful number in a new business is the lowest balance your bank account will reach over the next twelve months. Not the balance today, and not the balance at the year end: the lowest point, and the month it falls in.
You find it with a monthly cash flow forecast. List the money you expect in and out each month, in the month it actually moves, not the month the sale or purchase happens. The running closing balance will show you the trough. If it goes below zero, you have found a problem months before your bank would have told you about it, and you still have time to fix it.
Get paid faster
For most businesses that sell to other businesses, the biggest cash lever is not the price. It is when the money arrives.
- Invoice immediately. Every day between finishing the work and sending the invoice is a day added to the time it takes to be paid.
- Set short terms, and state them. Fourteen days is common for small businesses, and you can ask. Put the due date on the invoice as a date, not “30 days”.
- Take deposits or stage payments on larger jobs, so you are not funding materials and labour out of your own pocket until the end.
- Make it easy to pay. Payment links and card payments get invoices paid sooner.
- Chase politely, promptly and every time. A reminder the day after the due date works better than a firm letter a month later.
UK businesses also have a statutory right to claim interest and compensation on late payment from other businesses, which is worth knowing even if you rarely use it.
Time what you spend
The opposite side of the same coin. Where you have a choice, match when you pay to when you are paid.
- Use your suppliers’ credit terms in full, and pay on the due date rather than early.
- Lease or finance larger equipment instead of buying it outright, where the total cost is reasonable, so a big purchase becomes a monthly cost spread over its useful life.
- Buy stock in the quantities you need rather than the quantities that earn the best discount, until you know how fast it sells.
- Delay fixed commitments, such as a larger unit or a new hire, until the cash flow shows you can carry them.
Set tax aside as you go
The most common cash shock in a new business is a tax bill that nobody saved for. VAT, if you are registered, is money you collected on the government’s behalf and have to hand over each quarter. Corporation Tax on a company’s profit is due nine months and a day after the end of its accounting period. A sole trader’s first self assessment payment can include payments on account for the following year, so the first bill is often much larger than expected.
The simplest protection is a separate bank account. Move the VAT element of every payment you receive, and a percentage of profit for income or Corporation Tax, into it as money comes in. Then the bill, when it arrives, is already paid for.
Keep a buffer
Things will go slower than planned at some point. A customer pays late, a big order is delayed, a piece of equipment breaks. A cash reserve, even a modest one, turns those into inconveniences rather than emergencies. A sensible starting target is enough to cover two or three months of fixed costs: rent, wages, loan repayments and the bills that do not stop when sales do.
If you cannot build a reserve from your start-up funding, an overdraft or other facility arranged before you need it is the next best thing. Banks lend more readily to businesses that ask early, with a forecast showing why, than to businesses that ask in a crisis.
Look at it every month
A forecast written once and filed is not cash flow management. The habit that makes the difference is comparing what actually happened last month with what the forecast said, and rolling the forecast forward by a month.
It takes less than an hour once it is set up, and it tells you early whether sales are slower than planned, costs are running higher, or customers are paying later than you assumed. Each of those is easy to deal with in month three and hard to deal with in month nine.
When the forecast shows a gap
If your forecast shows the balance going negative, you have several honest options, roughly in order of how often they work:
- Change payment terms: faster payment from customers, or longer terms from suppliers.
- Move large purchases later, or finance them rather than paying outright.
- Arrange funding for the gap now, sized from the forecast.
- Change something in the business model, such as deposits, retainers or a different pricing structure.
What does not work is hoping the gap will close by itself.
Tools that help
SquarePlan’s software builds a monthly cash flow forecast from your answers, including VAT quarters, Corporation Tax and National Insurance, and shows your lowest point before you start trading. Once you are open, our business management support takes your monthly figures and sends back a short report on profit, cash and whether you are on track, from a chartered accountant. For the lender’s view of the same forecast, see what a lender checks in your cash flow forecast.