Cash flow

Also called Cashflow, Working cash

The money actually moving in and out of your bank account, and the reason profitable businesses still go under.

What it means

Cash flow is the movement of money in and out of your business over a period of time. Money in is what customers actually pay you; money out is what actually leaves — wages, suppliers, rent, tax, loan repayments.

It is not the same as profit, and the difference is the single most expensive misunderstanding in small business. Profit is worked out on invoices raised and bills received. Cash flow is worked out on money that has genuinely arrived or genuinely gone.

Why it matters

A business fails when it runs out of cash, not when it runs out of profit. You can be owed £80,000, be showing a healthy profit on paper, and still be unable to pay a £4,000 wage bill on Friday, because none of the £80,000 has landed yet.

Most insolvencies of otherwise viable businesses are cash flow failures. The order book was fine. The timing was not.

What it looks like in practice

A joiner invoices £20,000 for a job in March on 60-day terms. The materials were paid for in January. The wages went out in February and March. The £20,000 arrives in May. On the profit and loss account March was a good month; in the bank account January to April was four months of paying out with nothing coming in.

A simple cash flow forecast is a spreadsheet with one column per week for the next thirteen weeks, showing the opening bank balance, what you genuinely expect in, what genuinely goes out, and the closing balance. Thirteen weeks because that is roughly the horizon you can still do something about.

What to watch out for

Counting an invoice as money. It is a claim on money, and the debtor days figure tells you how long that claim usually takes to become cash.

Growth is a cash flow event, not just a good news event. Winning a contract twice the size of your usual one means paying for twice the materials and twice the labour before you get paid at all — this is why fast-growing businesses fail, and it has a name: overtrading.

VAT and PAYE money is not yours. It sits in your account looking like working capital and it belongs to HMRC.

Where to get proper advice

Your accountant or bookkeeper can build you a rolling forecast; most bookkeeping software will produce one from your actual figures. The British Business Bank's business guidance is free, independent of any lender, and practical.

If you are already behind on tax, HMRC's Time to Pay service exists and is far better used early than late.