# Small Business Finance

> 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.

- Skill: `joogy06/small-business-finance` (Agent Skill)
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- Category: Marketing & Growth
- Author: joogy06 (https://skillmd.com/u/joogy06)
- Updated: 2026-09-17
- Page: https://skillmd.com/skills/joogy06/small-business-finance

---


# 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.