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name: small-business-finance description: Use when advising on the financial reality of running a small business rather than on compliance — cash flow and why profitable companies still fail, the working-capital cycle and why growth consumes cash, online-retail economics including processor reserves, returns and marketplace fees, cash and till controls for local sales, the salary-versus-dividend decision and the distributable-reserves check, the monthly numbers worth watching, and the warning signs an accountant should raise before being asked. disambiguation: The FINANCIAL REALITY of running the business — cash flow, working capital, remuneration, what to watch monthly. Filing obligations and tax computation are accounting-uk-ltd and its uk-* siblings; market positioning and growth strategy are business-edge; page-level conversion work is ecommerce-growth.

Small business finance — what actually matters

Compliance keeps a company legal. This keeps it alive. They are not the same job, and an accountant who only does the first is not doing the second.

1. Profit is not cash, and cash is what kills companies

Most small businesses that fail are profitable when they fail. They run out of money, which is a different event, and the accounts will not warn you because a P&L does not show timing.

Profitable and insolvent, in one month:
  Sales invoiced            £40,000    (customers pay in 60 days)
  Costs paid                £30,000    (suppliers paid in 30 days)
  Profit                    £10,000
  Cash movement            −£30,000

Both figures are correct. One of them puts you out of business.

Three cash traps specific to a small UK Ltd:

• VAT collected is not your money. Every standard-rated sale banks 20% that belongs to HMRC one to four months later. A company spending its VAT is borrowing from HMRC without asking, and the quarter-end bill is the moment it becomes visible.
• Corporation tax lands 9 months + 1 day after year end, long after the profit was earned and usually spent. Set it aside monthly or it arrives as a shock.
• PAYE/NI is due the month after payroll, and it is money that was never the company's either.

The practical control: a separate account for VAT and CT, funded on a schedule rather than when the bill arrives. Unglamorous, and it is the single most effective thing a small company can do.

2. Working capital — and why growth consumes cash

Cash conversion cycle = stock days + debtor days − creditor days

The lower it is the less cash the business needs to operate. Negative is excellent — customers pay before suppliers do.

Growth consumes cash. Doubling sales means roughly doubling stock and debtors, and that money is spent before the extra profit arrives. A fast-growing business can fail faster than a flat one, and it fails while every trend line looks good, which is why nobody sees it coming.

The levers, in order of how much they typically move for a small company:

1. Get paid faster — terms, deposits, upfront payment, payment on order for new customers
2. Hold less stock — the biggest cash sink in retail, and the least visible
3. Pay suppliers on agreed terms — not early, not late
4. Watch the seasonal peak — stock buying precedes the sales it supports, so the cash low point is usually just before the best month

3. Online retail — where the money actually goes

Gross margin is not what lands in the bank. For each sale, subtract:

	Typical shape
Payment processing	~1.5–3.5%
Marketplace commission	often 10–15%
Returns and refunds	a rate, not an event — budget it
Shipping and packaging	often under-costed, especially returns
Chargebacks	small frequency, large per-event

Marketplace fees can exceed a small company's entire gross margin. A 12.8% fee against a 15% margin consumes ~85% of it. Price the channel separately — treating marketplace revenue as incremental at the same price is how businesses grow turnover while losing money.

Cash-flow specifics that catch online retailers:

• Processor reserves and holding periods. New or high-risk merchants can have a rolling percentage held back. That money is earned and not available — model it.
• Payout lag. Sale today, cash in 2–7 days, and longer over weekends and holidays.
• Refunds come out immediately, often before the original sale has settled.
• Stock is cash on a shelf. Slow lines are money you already spent, sitting still.

Know the unit economics per channel, not overall. A blended margin hides a channel that loses money on every order.

4. Local and cash sales

Cash businesses attract more HMRC attention, and the standard of record-keeping has to be higher — not because anything is wrong, but because there is no bank trail to corroborate the story.

• Reconcile the till daily. Takings recorded, cash counted, difference explained and recorded. Persistent unexplained differences are what an enquiry pulls on.
• Bank cash regularly and intact. Paying expenses out of the till before banking breaks the trail between sales and receipts, and it is very hard to reconstruct afterwards.
• Record the sale, not the banking. Sales are the takings figure; the deposit is a separate event through a clearing account.
• A drawer float is not income. It is an asset that never changes.
• Mixed cash and card days need both totals to tie to the day's sales figure.

Being unable to explain a cash difference is a bigger problem than the difference.

5. Paying yourself — salary vs dividend

The decision most owner-managers get advice on last, having already done it.

• Salary is a deductible company cost, brings PAYE/NI, and preserves State Pension entitlement. A common pattern is a salary around the NI thresholds.
• Dividends are paid from post-tax profit, carry no NI, and are taxed personally at dividend rates.
• The mix depends on personal circumstances — other income, pension aims, mortgage affordability evidence, and the current rates. This is where a qualified accountant earns their fee; the arithmetic changes at every fiscal event.

The hard rule that is broken most often:

A dividend can only be paid from distributable reserves. No reserves, no dividend — regardless of the bank balance. Money paid out anyway is a director's loan, and an overdrawn one triggers a s455 charge and a benefit-in-kind on beneficial interest.

Check reserves before each dividend and keep the paperwork. This is discovered a year later, during year-end, when unwinding is expensive (uk-statutory-accounts §4).

A director's loan is not a salary alternative. It is a debt, in whichever direction it runs.

6. The monthly numbers worth watching

Annual accounts are a post-mortem. These are the vital signs:

Number	Why
Cash balance and 13-week forecast	The only number that ends the business
VAT + CT set aside vs what will be owed	Are you spending someone else's money?
Debtor days and anything over terms	Cash you have earned and not received
Gross margin by channel	Where the money is actually made and lost
Stock value and ageing	Cash sitting still
Break-even — fixed costs ÷ gross margin %	The number that tells you what "enough" is

A 13-week rolling cash forecast is the highest-value thing a small business can maintain, and almost none of them do. It is short enough to be accurate and long enough to act on.

7. Warning signs — raise these unprompted

An accountant who spots these and says nothing has done the filing, not the job:

• VAT or PAYE paid late, or a time-to-pay arrangement — the earliest reliable distress signal
• Director's loan growing — the business is funding personal life, or vice versa
• Debtor days rising while sales are flat
• Stock growing faster than sales
• Margin falling while turnover rises — usually a channel or discounting problem
• Persistent unexplained cash differences
• Dividends taken with no reserves to support them
• Reliance on one customer, one channel or one supplier
• Personal guarantees or personal borrowing propping up the company

Say it early and plainly. These are all recoverable when raised in month two and often terminal by month ten.

8. Anti-patterns

• Reporting profit without cash. A P&L on its own has never told anyone whether they can pay next month's wages.
• Treating VAT and CT as future problems rather than money already committed.
• Blended margin hiding a loss-making channel.
• Paying dividends off the bank balance rather than distributable reserves.
• Treating marketplace revenue as incremental at the same price.
• Ignoring processor reserves and payout lag in a cash forecast.
• Only talking to the client at year end — by then every number is history.
• Filing accurately and saying nothing about what they show.