Cash flow is the movement of money into and out of a business. A business can be profitable on paper while simultaneously running out of cash — a situation that has ended more companies than outright losses.
Profit vs Cash Flow
Profit is an accounting concept: revenue minus costs over a period. Cash flow is practical: actual money received minus actual money paid out. They differ because of payment timing.
Net cash flow = Cash received − Cash paid out (same period)
Working capital gap = Days customers take to pay − Days you take to pay suppliers
Common Causes of Cash Flow Problems
| Cause | Why It Happens |
|---|---|
| Late customer payments | 30-day terms routinely paid at 60-90+ days |
| Rapid growth | Upfront staff/material costs before customer payment arrives |
| Seasonality | Strong summer revenue, weak winter cash reserves |
| Excess stock | Cash tied up in unsold inventory |
Managing Cash Flow Proactively
- 13-week rolling forecast: Shows tight periods before they become a crisis
- Invoice promptly: Every delayed payment day is effectively an interest-free loan to your customer
- Negotiate supplier terms: Extending payment terms while shortening customer terms improves working capital
- Cash reserve: Hold 1-3 months of operating costs as a buffer against shortfalls
Short-Term Cash Flow Solutions
Invoice financing and factoring allow a business to receive most of the value of an outstanding invoice immediately, rather than waiting weeks or months for the customer to pay according to their normal terms. The finance provider charges a fee for this service, but it's an effective and widely used tool for businesses with strong order books that are simply being held back by slow-paying customers.
A business overdraft or revolving credit facility provides a more flexible source of short-term cash, suited to bridging temporary gaps rather than funding long-term growth. It's more expensive than standard term lending, but the real key is arranging the facility before you actually need it — banks are understandably reluctant to extend credit to businesses that are already showing signs of cash flow stress, so the time to set this up is while finances are still healthy.
Invoice financing/factoring releases most of an outstanding invoice's value immediately rather than waiting for customer payment, for a fee. A business overdraft or revolving credit facility provides flexible short-term cash — arrange it before you need it, since banks are reluctant to lend to businesses already in crisis.
Cash Flow Forecasting in Practice
Building an effective cash flow forecast doesn't require sophisticated software — a well-maintained spreadsheet is sufficient for most small and medium businesses, provided it's updated consistently and treated as a living document rather than a one-off exercise. The forecast should list expected receipts based on when customers are realistically likely to pay, drawing on their actual payment history rather than the formal payment terms stated on the invoice, since the gap between stated terms and actual behaviour is often where forecasts go wrong.
Reviewing the forecast weekly, and comparing actual results against what was predicted the previous week, builds an increasingly accurate picture of your business's real cash flow patterns over time. Significant variances between forecast and actual — a customer who consistently pays later than expected, or a cost that's crept up without being noticed — should prompt an update to the underlying assumptions rather than being dismissed as one-off anomalies, since these patterns tend to repeat unless specifically addressed.