Why does cash run out before wages and VAT are due each month?

Why does the money arrive after the bills?

Most of what a company pays out falls on fixed dates. Payroll runs on the same day each month. Under standard VAT accounting, VAT is due on a set timetable whether or not customers have paid the invoices it was charged on. Suppliers want paying on their terms, and rent arrives on schedule.

The money coming in is far less tidy. A customer may take a month or two to pay, and some take longer still. So a business can be busy, profitable on paper and still find the bank balance at its lowest on the day the wages go out.

That is a timing gap. It can often be fixed, and the first step is seeing exactly where it falls.

What does the law say about when a customer must pay?

UK law gives suppliers some backing on payment dates. GOV.UK's guide to late commercial payments says that if you agree a payment date, it must usually be within 30 days for public authorities or 60 days for business transactions. A longer period can be agreed between businesses, but it must be fair to both.

Where no payment date is agreed, the same guidance says the payment is late 30 days after the customer gets the invoice, or after you deliver the goods or provide the service if that is later.

Once a payment is late, you can claim interest. The guidance on interest on late commercial payments says statutory interest is 8% plus the Bank of England base rate for business to business transactions, although you cannot claim it if your contract sets a different rate. On top of interest, you can charge a fixed sum towards the cost of recovering the debt, as set out in the guidance on debt recovery costs.

Amount of the late invoice	Fixed sum you can charge
Up to £999.99	£40
£1,000 to £9,999.99	£70
£10,000 or more	£100

You can only charge that fixed sum once for each payment. Whether you use these rights with a valued customer is a commercial judgement. Knowing they exist changes the tone of the conversation, because you are no longer asking for a favour.

How do you see the gap before it arrives?

A weekly cash forecast covering the next quarter is one of the simplest tools available.

Start with the opening bank balance. List every payment out by the week it actually leaves the account: wages, PAYE, VAT, rent, loan repayments and supplier runs. Then list money in by the week you realistically expect it, based on how each customer has actually paid in the past, not on the date printed on the invoice.

The weeks where the running balance dips are the gap. Once you can see them a few weeks ahead, you have choices. Seen on the day, there are far fewer options.

Is it a timing problem or a profit problem?

The forecast helps answer this.

A timing problem looks like this: over a full quarter, more cash comes in than goes out, but it arrives in the wrong weeks. Better payment terms, quicker invoicing and closer credit control can fix it.

A profit problem looks different. Even when every customer pays on time, the money in does not cover the money out. Chasing invoices harder will not fix that. Prices, costs or the shape of the business need to change, and that is a bigger conversation.

A company can have a little of both. Separating them stops you spending months on credit control when the real issue is margin.

Where do directors go wrong?

One mistake is treating growth as the cure. More sales feel like the answer to a cash shortage, but each new order often means paying for materials and staff weeks before the customer pays. Growth can widen the gap before it closes it.

Another is accepting long payment terms from large customers without pricing them in. A big name on the order book is welcome. Waiting a long time for its money is a cost, and it belongs in the price.

The third is VAT. Under standard VAT accounting, GOV.UK's guide to the Cash Accounting Scheme points out that you have to report your figures and pay HMRC even if the invoices have not been paid. Forgetting this means funding VAT on sales that have not yet turned into cash.

What small changes can free up cash?

None of these is dramatic. Together they can make a real difference to when cash arrives.

Change	What the official guidance says	Worth checking
Agree payment dates in writing	Agreed terms are usually within 60 days between businesses	Whether your standard terms set a date at all
Invoice on the day the work is done	With no agreed date, payment is late 30 days after the invoice or delivery, whichever is later	How long invoices sit before they are sent
Use statutory interest and fixed sums	Statutory interest is 8% plus base rate, unless your contract sets a different rate	Whether a contract already sets its own rate
Look at VAT cash accounting	You pay VAT on sales when customers pay you; turnover must be £1.35 million or less to join	Ask your accountant whether it suits you
Check how large customers pay	GOV.UK lets you search reports on how long large businesses take to pay suppliers	Use it before agreeing terms with a new large customer

On VAT, the eligibility rules say you cannot use cash accounting if you are not up to date with your VAT returns or payments, and you must leave the scheme if your VAT taxable turnover is more than £1.6 million. That is a decision for your accountant rather than for us.

On large customers, GOV.UK's service to check when large businesses pay their suppliers shows the average time a large business takes to pay and the proportion of payments it does not pay on time. A large business must publish its reports at least twice a year.

When is this not the answer?

Better cash management helps a business whose underlying trading is sound. It will not rescue one that is losing money on every sale.

If the forecast shows the company cannot pay its bills as they come in, even with every customer paying on time, directors should speak to a licensed insolvency practitioner. Questions about VAT schemes or tax treatment belong with an accountant or tax adviser, and recovering a disputed debt through the courts is work for a solicitor.

Sometimes the honest answer is that the gap is small and seasonal. A sensible overdraft agreed in advance, used for the few weeks it is needed, may be all the business requires.

Where can you get help with the forecast?

Knowing the gap is there is the first part. The second is finding the time to lay it out week by week and decide what to change first.

If you would like a second pair of eyes on your cash position, you can book a confidential consultation. We can help you build the forecast, separate timing from profit and plan the changes in a sensible order. You can read more about our operational support work.