A business can be profitable on paper and still be unable to pay its staff next month. In the UK, that gap is built into how money moves: customers pay on their own timetable, while wages, VAT and tax fall due on dates set by law. Growth makes the gap wider, not narrower, because every new sale has to be financed before it is collected.
A worked example
Take a small services firm that invoices £60,000 a month on 45-day payment terms. Its monthly costs are £52,000, mostly wages and subcontractors paid within the month. On paper it earns £8,000 profit each month.
In the first month it pays out £52,000 and receives nothing. In the second month it pays out another £52,000 and still receives nothing, because the first invoices are not due until day 45. By the end of month two it is roughly £104,000 down on cash, even though its sales ledger shows £120,000 of invoices and a healthy margin. If sales double, the hole doubles with it. The business needs working capital, an overdraft or invoice finance to bridge the gap, and each of those has a cost.
This is not unusual. It is the standard arithmetic of selling to other businesses on credit terms.
Tax dates do not wait for customers
Several UK obligations arrive on fixed dates:
- VAT. A VAT-registered business normally accounts for VAT when it issues the invoice, not when it is paid, and files quarterly returns. The VAT Cash Accounting Scheme, open to smaller businesses, lets a firm account for VAT only when money actually changes hands, which can ease the squeeze.
- PAYE and National Insurance. Employers report and pay these monthly, whatever their own receipts look like.
- Corporation tax. Most small companies must pay nine months and one day after the end of the accounting period, so the bill arrives long after the profit was earned and often after it was spent.
HMRC does offer Time to Pay arrangements to businesses that cannot meet a bill in full, but they need to be requested before or soon after the deadline, and interest still runs.
The law on late payment is on the supplier’s side, if they use it
The Late Payment of Commercial Debts (Interest) Act 1998 lets a business that supplies goods or services to another business claim statutory interest on overdue invoices, at 8% a year above the Bank of England base rate (using the reference rate set on 30 June or 31 December), plus a fixed sum per invoice: £40 for debts under £1,000, £70 for £1,000 to £9,999.99, and £100 for £10,000 or more.
As an illustration, if the reference rate were 4%, interest would run at 12% a year. An £8,000 invoice 60 days overdue would then carry about £158 of interest plus the £70 fixed sum. That is modest compared with the cost of waiting, which is why many small suppliers never claim it, and why the right is a lever in a negotiation rather than a cash source. Parties can agree a different rate in the contract, but it must be a substantial remedy to be valid.
Practical checks that matter more than the profit and loss account
- A rolling 13-week cash forecast, updated weekly, showing actual bank balances alongside expected receipts and every fixed date above.
- An ageing report for customer invoices, so a slow payer is spotted at 30 days overdue, not 90.
- Payment terms agreed in writing before work starts, with deposits or staged billing for larger jobs.
- A reserve sized to a few months of fixed costs, kept separate from the account that pays suppliers.
- A funding plan before it is needed. Lenders are far more receptive to a business with a forecast and a clean record than to one asking for emergency help.
Pressure on costs makes all of this tighter. How UK businesses are managing rising operating costs covers the cost side, but a firm that raises prices and cuts costs can still fail on timing if it does not watch cash separately.
Where the profit-and-loss account misleads
Profit counts a sale when it is made. Cash counts it when it is received. Growth that depends on buying stock, hiring staff or paying subcontractors ahead of customer payments will always consume cash first. That is not an argument against growth; it is an argument for knowing the lowest point the bank balance will reach before agreeing to the next big contract.
This is general business commentary, not accounting or financial advice. Any business facing a cash shortfall should speak to a qualified accountant, and may find free help through Business Debtline or Citizens Advice for smaller firms.
Sources: GOV.UK guidance on VAT Cash Accounting, corporation tax deadlines and Time to Pay; Late Payment of Commercial Debts (Interest) Act 1998 (legislation.gov.uk).
