Profit is an opinion formed at the end of a year. Cash is what is in the account on the day the rent is due. A business can be profitable on paper and insolvent in practice, and that is the most common way small businesses close.
This is the practical version: a forecast you will actually maintain, the habits that get you paid faster, and how much you need to keep back.
Quick Info
Core problem
The gap between doing work and being paid
Minimum reserve
Three months of fixed costs
Tax rule
A third of every payment, moved immediately
Best single change
50% deposits on all project work
Forecast horizon
Thirteen weeks, updated weekly
Warning sign
Chasing invoices to make payroll
Why profitable businesses run out of money
You invoice in March, get paid in May, but pay your staff and suppliers in March and April. Multiply that across several clients and a growing business consumes cash faster than it generates it. Growth makes this worse, not better, which is counterintuitive and catches people out.
—Payment terms mean revenue arrives thirty to sixty days after the work.
—Tax arrives in lumps, months after the income it relates to.
—Growth requires spending before the resulting revenue lands.
—One late payer can be the difference between comfortable and desperate.
—Profit on paper does not pay a supplier.
Cash flow is not an accounting topic. It is the reason otherwise successful businesses close.
Build a thirteen-week forecast
A spreadsheet, thirteen columns, twenty minutes a week. This is the single most useful financial habit a small business can have and almost nobody does it.
01Row one: opening cash balance for each week.
02Rows for money in: invoices due, by the week you realistically expect payment rather than the due date.
03Rows for money out: payroll, rent, subscriptions, suppliers, loan repayments, tax dates.
04Closing balance for each week, carried into the next.
05Update it every Monday morning. Ten minutes.
06Look for the weeks that go negative. That is what the forecast is for.
Thirteen weeks is the right horizon because it is long enough to see a problem coming and short enough to be worth maintaining. Annual forecasts are for banks; weekly ones are for you.
Get paid faster
Every item here is a change you control, and together they typically pull weeks out of your cash cycle.
01Take 50% up front on project work. This is standard practice and clients expect it. It is the single biggest improvement available.
02Invoice the day the work is done, not at month end. A week's delay in invoicing is a week's delay in payment.
03Shorten your terms. Fourteen days rather than thirty. Most clients pay on receipt of a reminder regardless of terms.
04Put a payment link on every invoice. Removing friction genuinely accelerates payment.
05Use direct debit for recurring work. It nearly eliminates late payment.
06Automate reminders at seven, fourteen and twenty-one days overdue. Your accounting software does this and most people never switch it on.
07For larger projects, bill in stages tied to milestones rather than at completion.
Chasing late payments
Uncomfortable, necessary, and more effective when it is systematic rather than emotional.
01Day one overdue: automated polite reminder. Most payments arrive here.
02Day seven: a personal email to the person who signed off, not the accounts inbox.
03Day fourteen: telephone call. This is the step that works and the one people avoid.
04Day twenty-one: formal notice referencing your terms, including any interest you charge.
05Day thirty: stop work on anything ongoing, having said you would.
06Beyond that: a letter before action, then a small claim. Rarely necessary and worth knowing you will do it.
—In the UK you have a statutory right to interest and reasonable costs on late commercial payments. Putting it in your terms changes behaviour even if you never invoke it.
—Do not keep working for a non-payer. The debt grows and the relationship does not improve.
—Notice which clients pay late repeatedly. That is a client selection decision, not an admin problem.
Manage the tax gap
The most common cash flow disaster in a first or second year: spending money that was always going to be tax.
—Move a third of every payment received into a separate account, immediately. Not at year end.
—Do the same with VAT if you are registered. VAT collected is not your money at any point.
—Note your payment dates in the calendar with a month's warning.
—If you are on payments on account, remember the January payment includes a chunk of the following year.
—Never borrow to pay a tax bill you could have set aside for. The interest is the least of the problem.
The tax you owe was never your income. Moving it out of the account the day it arrives removes the temptation and the crisis.
How much reserve you need
Three months of fixed costs as a minimum: rent, salaries, subscriptions, loan repayments. Six months if you have employees or a lumpy sales cycle.
01Calculate your monthly fixed costs. Not total spend, the part you cannot switch off.
02Multiply by three, or six if you employ people.
03Build towards it from every payment, in a separate account you do not treat as available.
04Rebuild it after using it. A reserve used once and never replaced is a reserve you had.
This is boring and it is the difference between a bad quarter being an inconvenience and being terminal.
Reduce the fixed costs that trap you
—Prefer variable to fixed. Subcontractors over employees, monthly over annual, pay-per-use over capacity.
—Audit subscriptions quarterly. They accumulate invisibly and each one is a permanent monthly commitment.
—Be careful with annual contracts and leases. The discount is real and so is the commitment.
—Negotiate payment terms with your own suppliers. Paying at thirty days rather than on receipt is free working capital.
—Do not sign a premises lease until the business genuinely needs one.
The warning signs
—Chasing invoices specifically to cover payroll or rent.
—Using a credit card or overdraft for routine operating costs.
—Not knowing your current bank balance without looking.
—Delaying supplier payments to manage the month.
—Taking work you do not want because you need the deposit.
—Not having set aside tax.
Any two of those together is the point to act, which usually means raising prices, cutting a fixed cost, or having a frank conversation with your accountant. It rarely means finding more customers, because more customers consume more cash before they pay.
What to do this week
01Build the thirteen-week forecast. Twenty minutes.
02Open a separate tax account and move a third of your last payment into it.
03Switch on automatic payment reminders in your accounting software.
04Add 50% deposits to your terms for new project work.
05List your fixed monthly costs and calculate your three-month reserve target.
06Put the forecast update in the calendar as a recurring Monday appointment.
Frequently Asked Questions
What is cash flow, in simple terms?
The timing of money in and out of your account. Profit is what you earn over a period; cash flow is whether you can pay this week's bills.
How much cash reserve should a small business have?
Three months of fixed costs as a minimum, six if you employ people or have a lumpy sales cycle.
How do I get clients to pay faster?
Take 50% deposits, invoice immediately, shorten terms to fourteen days, put a payment link on invoices and switch on automatic reminders.
How much should I set aside for tax?
Roughly a third of each payment, moved to a separate account immediately, plus VAT separately if you are registered. Check your own position with an accountant.
What should I do about a client who will not pay?
Escalate systematically: reminder, personal email, phone call, formal notice, stop work. Do not keep working while the debt grows.
Why does growth cause cash flow problems?
Because you spend on delivery before the resulting revenue arrives. Faster growth widens that gap, which is why growing businesses need more cash, not less.
Before You Go
Build the thirteen-week forecast, take deposits, move the tax out on arrival, and hold three months of fixed costs. Those four habits prevent almost every cash crisis I have seen.
And if you are constantly short despite being busy, the problem is usually the price rather than the cash management. That guide is here.
Forecast weekly. Take deposits. Move the tax out.
WRITTEN BY TARIQ SALLAM
Marketing Consultant. Entrepreneur. Content Creator.
I'm a marketing consultant, entrepreneur and content creator. I help businesses grow through practical marketing, websites, SEO, content and AI.
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