Cash flow is the movement of money into and out of a business over a period. Cash inflows are receipts such as customer payments, loans and new share capital; cash outflows are payments such as wages, suppliers, rent, tax and loan repayments. The difference is net cash flow. A business with positive cash flow ends the period with more money than it started with; a business with negative cash flow is using up its reserves or borrowing, even if its accounts show a profit.
Cash flow in plain terms
Think of the bank balance at the start of the month, add everything that came in, subtract everything that went out, and you have the closing balance. That is cash flow. It ignores invoices raised but not paid, bills received but not settled, and non-cash items such as depreciation. It only cares about when money actually moves.
Accountants split cash flow into three streams, which is also how a formal cash flow statement is laid out:
- Operating. Cash from day-to-day trading: customer receipts less payments to suppliers, staff and HMRC;
- Investing. Buying or selling long-term assets such as equipment, vehicles or property;
- Financing. Loans drawn and repaid, shares issued, and dividends paid to shareholders.
A healthy trading business generates positive operating cash flow over time. Positive overall cash flow driven only by new borrowing is a different and weaker picture.
Why profit is not the same as cash
Company accounts are prepared on the accruals basis: income is counted when it is earned and costs when they are incurred, regardless of when cash changes hands. That gap is why profitable businesses can run out of money.
Worked example. A consultancy invoices £30,000 in October on 60-day terms and pays £18,000 of salaries and £4,000 of other costs in the same month. October's profit is £8,000. October's operating cash flow is minus £22,000, because none of the £30,000 has arrived. If the client then pays late, the shortfall rolls into November, when payroll is due again. Nothing is wrong with the business on paper; the problem is timing.
The reverse also happens. A business that takes deposits up front, or pays suppliers slowly, can hold more cash than its profit suggests, and that cash is not all its own.
The dates that drain cash in a UK business
Many cash flow surprises are tax payments that were entirely predictable:
- Corporation Tax. Due 9 months and 1 day after the end of the accounting period for companies with taxable profits up to £1.5 million; larger companies pay in instalments;
- Self Assessment. The balancing payment is due by 31 January, and payments on account, each half of last year's bill, are due by 31 January and 31 July. A sole trader whose profits jump can face a January bill covering a balancing payment and a first payment on account at once;
- VAT. Payable by the deadline shown on each VAT return. VAT collected from customers is not the business's money, and spending it is a common route into arrears.
Putting these on a calendar alongside payroll and rent is the starting point for any forecast. Our guide to cash flow monitoring covers the 13-week rolling forecast in detail.
Your rights when customers pay late
Slow-paying customers are the most common cause of operating cash shortfalls. Under the Late Payment of Commercial Debts (Interest) Act 1998, where no payment date is agreed, payment is late 30 days after the customer gets the invoice or the goods or service are delivered, whichever is later. Agreed terms longer than 60 days are allowed only where they are not grossly unfair to the supplier.
On a late business-to-business debt you can claim statutory interest at 8% above the Bank of England reference rate (the official rate in force on 30 June or 31 December, depending on when interest starts to run), plus a fixed sum per invoice:
| Amount of the debt | Fixed sum |
|---|---|
| Less than £1,000 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
Bank Rate has been 3.75% since 18 December 2025, so it was the rate in force on both 31 December 2025 and 30 June 2026, and statutory interest on debts that fall late during 2026 runs at 11.75% a year. On that basis, a £5,000 invoice paid 40 days late carries interest of £5,000 × 11.75% × 40 ÷ 365 = £64.38, plus the £70 fixed sum. Stating the right on invoices and in terms tends to change payment behaviour. Our credit control procedures guide covers the collection process.
When cash flow becomes a legal question
For a company, persistent negative cash flow is more than a management problem. Under section 123 of the Insolvency Act 1986, a company is deemed unable to pay its debts if it is unable to pay them "as they fall due" (the cash flow test), or if its assets are worth less than its liabilities, taking into account contingent and prospective liabilities (the balance sheet test). Directors who see either test approaching should take advice early; our guide to insolvency explains what follows.
Practical ways to improve cash flow
- Invoice promptly. Where no date is agreed, the 30-day period runs from when the customer receives the invoice, or from delivery if later;
- Shorten terms or take deposits. Especially on long projects where costs are incurred up front;
- Chase on a fixed routine. A reminder before the due date and a call on the day after;
- Set aside tax monthly. Move a percentage of receipts into a separate account for VAT and Corporation Tax or Self Assessment;
- Match finance to the need. Use an overdraft or invoice finance for timing gaps, and longer-term finance for equipment.
Primary sources: the Late Payment of Commercial Debts (Interest) Act 1998, s4 and s5A, the Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002, art 4, Insolvency Act 1986 s123, the Bank of England's Bank Rate page, and HMRC guidance on paying Corporation Tax and payments on account.
If you would like a clearer view of cash coming in and going out, our management accounts service includes cash reporting, and our financial modelling team can build a forecast you can update yourself.