Go Limited - How to Manage Cash Flow When Running a Limited Company
Go Limited - How to Manage Cash Flow When Running a Limited Company
There's a lot to do when you have a limited company to run, but don't let cash flow management fall behind. It's there to ensure that your business has enough cash to operate smoothly and it's vital for contractors, not just for survival, but for growth.
At Go Limited, we know that managing cash flow can seem complicated, but it really isn't. Once you understand the ins and outs of cash flow - and why managing it is so important - you'll be on your way to building a financially healthy business.
Understand Your Limited Company Cash Flow Cycle
When we're talking about cash flow, we're talking about the movement of money in and out of your business. Money flows in when an invoice is paid by a client, and money flows out when you have expenses, wages, overheads and raw materials to cover. There's a lot that goes into setting up a limited company, but understanding your cash flow cycle is an aspect that's often overlooked, despite it being a hugely important part of the financial side of things.
Your Limited Company Cash Flow Cycle Will Typically Include:
1. Invoice Creation and Submission - As a limited company contractor, you will usually invoice clients weekly, fortnightly or monthly. The timing of these invoices has a direct impact on cash availability.
2. Client Payments - Payment terms affect when money enters your account, as it gives clients a timeline for paying an invoice. Late payments are a common cause of cash flow stress, which is why having clear payment terms and chasing client payments is key.
3. Operating Expenses - It's hard to run a business without any operating expenses. Outflows including salaries, rent, utilities, taxes, pensions and insurance all need to be taken into account. These need to be timed against incoming cash to avoid gaps.
4. Profit Distribution or Reinvestment - After covering business expenses, money can be retained for growth or paid out as dividends, which will be reflected in your cash flow cycle.
Mapping your cash flow cycle helps you to predict financial shortages and make proactive decisions about the money in the bank, rather than reacting to crises at the last minute and hoping for the best. It's an important part of growing a successful business and advancing your career.
Limited Company Cash Flow vs. Limited Company Profit
Though they are often spoken about together, cash flow is different to profit. Profit shows whether your business is financially healthy on paper, whereas cash flow looks at whether your limited company can meet its short-term financial obligations.
Why is Good Cash Flow Management Important for Contractors?
Cash flow management isn't something you can overlook, especially as a contractor running a limited company. As your income is likely to vary from one month to the next, and client payments can be inconsistent, keeping on top of the money flowing in and out of your business is vital. Otherwise, you'll quickly find yourself facing operational problems and day-to-day spending challenges, even when your profits look healthy on paper.
Key Reasons Cash Flow Management Matters for Limited Companies:
When you prioritise cash flow management as a limited company contractor, you ensure bills and salaries are paid on time. It's a lot easier to avoid late fees and maintain good relationships with employees, subcontractors and suppliers when everyone is paid on time. It's also a key part of supporting business growth. When your cash flow is under control, you can decide how to invest in training, new equipment or marketing to attract better clients, without putting your business at risk financially. Plus, knowing when money is coming in and going out makes it easier to make confident business decisions, reducing stress and uncertainty.
The Risk of Not Managing Limited Company Cash Flow
Failing to properly manage cash flow when running a limited company doesn't just make things difficult from an organisational standpoint, it also puts your business at risk of late payments, penalties, damaged reputation, insolvency and reliance on short-term credit.
1. Late Payments and Penalties - If you're not managing your limited company cash flow correctly, you could end up missing tax deadlines, VAT or supplier payments, all of which can incur fines.
2. Damaged Reputation - It doesn't look good when a business pays people late. Late payments to suppliers, subcontractors or staff can harm long-term business relationships.
3. Reliance on Expensive Credit - If you need money quickly, you might find yourself relying on short-term credit. High interest borrowing might be necessary if cash flow isn't managed, but it's expensive, which reduces your business' profitability.
4. Risk of Insolvency - Running out of cash can force even profitable businesses to close temporarily or permanently, and it's hard to come back from that. It can set your contracting back in a big way.
As you can see, cash flow management is non-negotiable for limited company contractors.
Don't Set Up a Limited Company Without a Cash Reserve
There's no denying the excitement that comes with setting up a limited company. But, don't rush into things and overlook one important step - building up and setting aside a cash reserve. Even profitable businesses face unexpected expenses such as delayed client payments, unexpected equipment breakdowns, seasonal dips in income, tax bills, pensions and other payments. If you don't have a cash reserve, you don't have a financial buffer to fall back on. For most contractors, aiming to maintain three to six months' worth of operating expenses in a separate account is ideal.
Managing Cash Flow: Tips and Tricks to Help You Stay Afloat
Managing cash flow as a limited company contractor doesn't need to be daunting. With the right strategies, you can maintain a healthy cash flow in your limited company.
1. Invoice Promptly and Clearly
You need to send invoices as soon as work is completed, and include clear payment terms and options. This ensures clients know when to pay, how much to pay and the types of payments you accept. You can also use professional invoicing software for tracking and reminders, giving you more time to focus on running your business, knowing that everything is being managed by technology.
1. Negotiate Payment Terms with Clients and Suppliers
There's always a bit of flexibility with payment terms, so be sure to negotiate. Ask clients for shorter payment terms if feasible, to ensure you get paid as soon as possible. It's also a good idea to extend your supplier payments where possible, as long as you can do so without incurring penalties. By taking this approach, you make sure you always have client payments secured before you have to pay anything out.
1. Track and Forecast Cash Flow
Don't leave anything about cash flow to chance. Maintain a rolling forecast of at least three to six months, so you have a good idea of what to expect from the future. Monitor trends - such as periods of high spending or slow client payments - and use that information to accurately guess what the future holds. If you know you have a historically low spending season coming up, you can change your approach to ensure it has as little of an impact as possible.
1. Control Costs
You need to keep on top of your costs, as you don't want to be spending more than you need to.
Regularly review recurring expenses, subscriptions and overheads, and cancel or reduce anything you don't need. There's no point spending money on subscriptions that you rarely use.
You could even consider outsourcing non-essential tasks to reduce payroll costs.
1. Use Short-Term Financing Wisely
Overdrafts, invoice factoring or business loans can cover temporary gaps, but they're often costly. Avoid relying on credit for ongoing operational costs, as this is a slippery slope that often ends up with businesses spending more than they can comfortably afford to pay back. Instead, use financing for big, planned purchases, and avoid paying for day-to-day running costs with credit cards or loans.
1. Separate Personal and Business Finances
Don't make the mistake of keeping personal and business finances together, assuming it's simpler to have one bank account. If you set up a limited company, you need to have two different bank accounts, one for personal use and one for business use. This will make it easier to manage cash flow, as you'll clearly see everything that's flowing in and out of the business. It's also important to avoid drawing excessive dividends that can deplete cash needed for operations.
At Go Limited, we know that managing cash flow is more than a bookkeeping task, but that doesn't mean it's something that needs to fill contractors with dread. Understanding your cash flow cycle, maintaining a cash reserve, forecasting accurately and using tracking tools can prevent crises, support growth and give you peace of mind. With the right planning and the right strategies, cash flow can become one of your business strongest competitive advantages.
How to Stay Calm and Stress-Free During HMRC Investigations
Of course, sometimes an investigation is out of your control and HMRC will decide to investigate regardless of how careful you've been with tax returns, IR35, expenses and income. It's important to remember that an HMRC investigation is a process, often random, and not a personal attack.
Though the process is bound to cause a small amount of stress, it doesn't need to be something you dread or immediately feel overwhelmed by. If you do find yourself at the centre of an investigation, there are things you can do to stay cool, calm and collected.
1. Don't Panic - A lot of contractors panic when they find out HMRC are investigating them. But, you need to remember an investigation is a routine part of their compliance checks, and not an attack on you personally.
2. Stay Professional - Knowing you're being investigated can be annoying, especially if you don't think you've done anything wrong, but you need to stay professional. Approach all correspondence and phone calls with HMRC professionally, and avoid having emotional reactions.
3. Organise Your Documentation - You can make the HMRC investigation process simpler by organising all of the documents related to your contracting. Gather contracts, invoices, receipts, bank statements and dividend records before they ask.
4. Enlist Professional Help - There's a lot of help out there for contractors, including those undergoing HMRC investigations. Talking to a tax professional or fellow contractors who have gone through investigations can be reassuring.
Finding out HMRC are investigating you can feel stressful to begin with, but it's not the end of the world. By remembering not to panic, staying professional, asking for help and getting all of your paperwork in order, you can streamline the process.
Preparing Your Limited Company Records for a HMRC Investigation
There's a lot of paperwork involved with being a contractor and running a limited company, but that doesn't mean you can let organisation slip. Keeping up-to-date and accurate records can be the difference between a smooth HMRC investigation and a stressful one.
1. Keep all client contracts, amendments and emails confirming work scope organised.
2. Make sure every invoice is backed by supporting evidence of work you've completed.
3. Use professional accounting software for bookkeeping, expense tracking and payroll.
4. Avoid mixing personal spending with your business bank account.
5. Ensure dividend payments comply with regulations and are properly recorded in board minutes.
6. Keep detailed notes of why your contracts are considered outside or inside IR35.
It's a lot easier to provide HMRC with clear, accessible information when everything is organised, accessible and accurate.
FAQ: How to Manage Cash Flow When Running a Limited Company
What does "cash flow" mean for a limited company?
Cash flow is the movement of money into and out of your business. Positive cash flow means you have more money coming in than going out, allowing you to cover bills, taxes, and investments. Negative cash flow means outgoings exceed incomings — a common reason small companies run into financial trouble. For contractors, even profitable companies can face problems if client payments are late or expenses build up unexpectedly.
Why is cash flow so important for contractors?
Even if your company looks profitable on paper, poor cash flow can leave you unable to pay suppliers, HMRC, or even yourself. Contractors often rely on one or two key clients, which makes them more vulnerable to late payments. Good cash flow management ensures you always have enough in reserve to pay salaries, Corporation Tax, VAT, and personal dividends without stress.
What are the main causes of cash flow problems?
The most common issues contractors face include:
- Late client payments — especially on 30, 60, or 90-day terms.
- Poor tax planning — forgetting to set aside money for Corporation Tax, VAT, or personal tax bills.
- Irregular income — gaps between contracts can dry up company cash.
- Overdrawing funds — taking too much in salary or dividends before profit is clear.
- Unexpected costs — insurance, equipment, or emergency repairs.
How can I improve cash flow in my limited company?
- Invoice promptly and clearly – include payment terms and chase late payments quickly.
- Build a reserve – aim for 3–6 months of business and personal expenses in your company account.
- Budget for tax – set aside Corporation Tax, VAT, and personal tax as you earn, ideally in a separate account.
- Keep overheads lean – avoid unnecessary subscriptions or expenses.
- Plan dividends carefully – only pay them from retained profits.
Should I pay myself a salary or just dividends?
Most contractors use a mix of low salary plus dividends. A salary gives you National Insurance contributions and helps with mortgage applications, while dividends are more tax-efficient. From a cash flow perspective, the key is not to overdraw dividends. Paying yourself too much, too early can leave your company unable to meet upcoming bills.
How do taxes affect cash flow?
Taxes are one of the biggest drains on cash flow if not planned for. Limited companies must account for:
- Corporation Tax (currently 25% for many companies).
- VAT (quarterly if registered).
- PAYE/NIC (if you have employees or pay yourself a salary).
- Personal tax on dividends.
- A simple method is to transfer a fixed percentage of income (e.g. 25–30%) into a "tax pot" each month, so the money is ringfenced when deadlines arrive.
What tools can help manage cash flow?
- Accounting software (e.g. Xero, FreeAgent, QuickBooks) to track invoices, expenses, and tax liabilities.
- Cash flow forecasts – spreadsheets or software tools that project money in/out for the next 3–12 months.
- Separate bank accounts – one for trading, one for tax, and one for reserves.
How should I handle late client payments?
- Set clear payment terms in your contracts.
- Consider upfront deposits for new clients.
- Send reminders before due dates.
- Charge late payment interest under the Late Payment of Commercial Debts Act.
- If persistent, use a debt recovery service.
- Late payments are a leading cause of contractor stress, so being firm but professional is essential.
How much should I keep in reserve?
A good rule of thumb is to keep at least three months of company running costs in cash. If you're a contractor with no employees, this often means covering your salary/dividends, tax bills, and business expenses. Building this buffer smooths out gaps between contracts or delayed payments.
Can an accountant help with cash flow?
- Yes — and for many contractors, they're invaluable. An accountant can:
- Help forecast upcoming tax and expenses.
- Advise on when and how much to pay yourself.
- Identify patterns of overspending or risky withdrawals.
- Spot cash flow problems before they escalate.
- Often, the cost of an accountant pays for itself in better tax planning and reduced financial stress.
✅ Key takeaway: Running a limited company isn't just about earning money — it's about managing the timing of money. Good cash flow habits protect you from tax shocks, late payments, and contract gaps, ensuring your business stays resilient.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
