Building a buffer that survives a quiet quarter

Profitable businesses run out of money. It happens more often than most owners expect, and it very rarely happens suddenly. It happens because a quiet quarter arrives at the same time as a tax bill and two customers paying forty days late.

The scale of the problem

Late payment is not an occasional irritation, it is a structural feature of UK business. Research by the Federation of Small Businesses, based on a survey of more than 2,000 small business owners, found that 60% say late payments are actively holding back their growth, and that 63% spend time chasing overdue money, at an estimated cost of up to £5,200 a year in lost time and resources.

Half of those surveyed had come to see late payment as simply an inevitable part of doing business, and around a third felt they had little or no control over it, particularly when dealing with larger customers.

The government's own figures put the cost of late payment to the UK economy at around £11 billion a year, and attribute roughly 38 business closures a day to it.

Build the buffer before you need it

A reasonable target is three months of fixed costs held separately from your working balance. Not three months of turnover, and not a vague intention to keep the account healthy. Work out what leaves the business every month regardless of trading, which is rent, salaries, software, insurance, loan repayments, and build toward three times that number.

Three months is enough to absorb a bad quarter, a large customer paying late, or the loss of a significant contract, without decisions being made under pressure. Decisions made under cash pressure are almost always the expensive ones.

Keep the tax money separate

The most common avoidable cash crisis we see is a business that spent its VAT or its corporation tax because it was sitting in the current account. Open a second account, move the tax across every time you invoice or every time a VAT return is prepared, and treat it as money that was never yours. It is a five minute change that removes an entire category of problem.

Get paid faster

• Invoice the day the work is done. The most common cause of slow payment is slow invoicing.
• Shorten your terms. Thirty days is a convention, not a law. Fourteen is perfectly reasonable for smaller jobs, and most customers will not object.
• Take deposits. For project work, an upfront payment funds the delivery instead of the delivery funding itself.
• Set up direct debit for anything recurring. It removes the decision to pay from the customer entirely.
• Chase early and without apology. A polite reminder the day after terms expire is not rude, it is normal practice.
• Credit check new customers before extending significant terms, especially where the job is large relative to your monthly turnover.

You have a statutory right to interest

Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses can charge statutory interest on overdue commercial invoices, along with a fixed sum toward recovery costs. Many small businesses never mention it, worried about the relationship. You do not have to invoice for it to reference it, and stating your rights on the invoice itself tends to move you up the payment queue without a single awkward conversation.

Forecast thirteen weeks ahead

Annual budgets are for planning. A rolling thirteen week cash forecast is for surviving. List what is genuinely coming in, week by week, based on realistic payment dates rather than invoice dates, then list what is going out, including tax, VAT and any annual bills that fall in the period.

The value is not accuracy, it is warning. A gap eight weeks out is a manageable problem with several solutions. The same gap discovered on the day is a crisis with one or two, both expensive.

If your bookkeeping is current, this takes about twenty minutes a week. If it is not, that is the thing to fix first.

Sources: Federation of Small Businesses and GoCardless, survey of over 2,000 small business owners; UK Government estimates on the economic cost of late payment.