What cash pays for: suppliers, overheads and employees

1. Cash is the only thing that settles a bill, because a supplier, a landlord or an employee cannot be paid with a sale that has not yet turned into money.
2. Three payments fall due whether or not the money has arrived.
   1. Suppliers: stock and materials are usually delivered on credit, so a missed payment means the supplier refuses the next delivery, the shelves empty and sales stop.
   2. Overheads: rent, energy, insurance and business rates are billed on fixed dates whatever the takings were that week, and unpaid rent can cost the business its lease on the premises.
   3. Employees: wages must be paid in full and on time, staff who are not paid leave for another employer, and a shop with nobody behind the counter cannot trade at all.
3. A bakery in Leeds owes £2,400 of rent on the first of the month and around £3,000 of wages every four weeks, and neither date moves when a wet week cuts takings by a third.
4. Miss one payment and the damage spreads to the others, because no stock means no sales, no sales means no cash, and no cash means no wages the following month.

Insolvency: failing on the day the bill lands

1. A business is insolvent once it cannot pay its debts as they fall due, and the people it owes can then take it to court, force it to close and have its assets sold to recover what they are owed.
2. The test is about timing, not about being unprofitable.
3. A firm with orders on the books and a profit on paper still fails if the cash is not in the account on the day the invoice has to be paid.
4. Suppliers usually feel it first, because they notice a missed payment within days and can switch the business to cash up front or stop supplying it.
5. That is why a cash shortage deepens instead of correcting itself: deliveries stop, so there is less to sell, so less money comes in to pay the next bill.

Why cash runs short in a business that is trading well

1. A full order book does not guarantee cash, because four gaps drain the bank account faster than sales refill it.
   1. Customers on credit: a trade customer who pays 60 days after delivery leaves the business paying for materials and wages now and collecting the money two months later.
   2. Money tied up in stock: cash spent on goods sitting unsold in a stockroom has already left the account and only comes back when the item is sold.
   3. Large one-off bills: a VAT bill from HMRC or a £12,000 replacement oven can take out a month's cash in a single payment.
   4. Seasonal trade: a garden centre buys stock and pays staff through the winter, weeks before the spring rush brings any money in.
2. Each gap is a matter of timing rather than a loss, so the fix is planning when money moves in and out, not simply selling more.