Financial planning
How business owners can plan cash flow more effectively
Profit is calculated once a year by an accountant. Cash is settled every Friday by whoever pays the salaries. Only one of them can put you out of business.
Why profitable businesses run out of money
Profit records sales made and costs incurred; cash records money actually received and paid. Between the two sits the operating cycle — the period during which your money is committed to stock and to customers who have not yet paid. A growing business finances a growing cycle, which is why rapid growth so often feels like poverty.
The thirteen-week forecast
Annual budgets are for planning. Thirteen-week forecasts are for surviving. The horizon is short enough to be reasonably accurate and long enough to act on — you can still negotiate terms, chase a payment or arrange a facility with eight weeks' notice. With eight days' notice you cannot.
Start with committed outflows
Salaries, rent, statutory dues, EMIs and contracted supplier payments, by week. This is the fixed spine and it is knowable with precision.
Add inflows by expected date, not due date
Use each customer's actual payment behaviour. The customer who has paid on day 75 for two years will not pay on day 45 because the invoice says so.
Find the weeks that go negative
The forecast's entire value sits in these weeks. Everything else is reassurance.
Decide how each trough is covered, now
A collections push, extended supplier terms, deferring a discretionary payment, or drawing on a facility. The point is that the decision is made calmly and in advance.
Set a minimum balance and defend it
A floor the business does not go below. A buffer only works if it is genuinely untouchable.
Review weekly against actuals
Where the forecast was wrong, ask why. After two months it becomes genuinely predictive; after six it becomes the most useful document in the business.
Where the cash is trapped
| Where | Question to ask | Typical improvement |
|---|---|---|
| Stock | What proportion has not moved in 90 days? | Stop reordering slow lines by habit; liquidate what is dead rather than defending its book value |
| Debtors | How many days beyond terms does each customer actually take? | Invoice on delivery day; follow up on a schedule; consider discounting confirmed invoices from strong buyers |
| Suppliers | Are we paying faster than we are paid? | Negotiate terms deliberately — supplier credit is often the cheapest funding available |
| Growth | Is each new order funded before it is accepted? | Model the working capital a large order consumes before agreeing to it |
| Drawings | Are owner withdrawals budgeted or opportunistic? | Set a fixed, sustainable drawing and treat it as a cost of the business |
Fund the gap, or fix it?
Both are legitimate. The mistake is choosing without diagnosing.
- A timing gap — the money is coming, just not yet — is a financing problem. A working capital limit or receivable-linked finance fits.
- A cycle that is longer than it needs to be is an operations problem. Collections, terms and inventory policy fix it, permanently and at no interest cost.
- A margin problem is neither. Borrowing adds an EMI to a business that already cannot cover its costs. Pricing, cost or mix has to change first.
Most businesses have some of all three. Sequencing matters: fix what is cheap to fix, then finance the genuine gap that remains — sized properly, not generously.
Separate the two balance sheets
For owner-run businesses, personal and business money tend to blend. This causes three problems at once: lenders cannot verify turnover, tax positions get complicated, and a weak quarter in the business quietly consumes personal savings that were meant for something else.
Separating them — a genuine business account, a fixed and sustainable owner drawing, and an emergency reserve held outside the business — is the single most useful structural change most owners can make. It improves borrowing capacity, simplifies tax, and means one bad quarter does not become a personal crisis. More on this in financial planning for business owners.
Related: cash flow planning and working capital or term loan.