Cash Flow Management for UK Contractors: A Practical Guide

🔹 Introduction

Cash flow—not profit—is the #1 reason contractors struggle or fail in the UK construction sector. With project delays, staged payments, retentions, and materials to pay for upfront, even profitable businesses can run into serious financial trouble without tight control over cash. This guide walks you through the fundamentals of cash flow management, tailored for UK contractors and construction firms, including how to forecast, speed up payments, and prevent cash shortfalls.

---

🔹 What is Cash Flow?

Cash flow is the movement of money in and out of your business. Positive cash flow means:

• You have enough to cover wages, suppliers, and tax bills
• You can invest in tools, vans, or marketing
• You sleep better at night

Negative cash flow = relying on overdrafts or delaying supplier payments.

---

🔹 Why Contractors Face Unique Cash Flow Challenges

Challenge	Impact
Staged or delayed payments	You pay for labour/materials before getting paid
Retentions	3–5% withheld for months after completion
Materials ordered upfront	Cash goes out before work even starts
Labour-heavy billing	Delayed CIS payments and tax deductions
Late-paying clients	Leads to downstream payment delays

---

🔹 1. Create a Cash Flow Forecast

Use a rolling 12-week forecast to:

• Track incoming and outgoing payments
• Plan for VAT, payroll, CIS, and Corporation Tax
• Predict shortfalls before they become problems

Tools to use:

• Float (Xero add-on)
• Fathom (for bigger contractors)
• Excel or Google Sheets (if just starting out)

---

🔹 2. Set Clear Payment Terms

• Always include payment terms on quotes and contracts
• Use 14 or 21-day payment terms—not 30+ by default
• Add late payment interest clauses
• Include stage payments for longer jobs

💡 State your terms early and enforce them consistently.

---

🔹 3. Improve Invoicing Efficiency

• Invoice immediately upon milestone or job completion
• Use software (Xero, QuickBooks, Tradify) to automate
• Ensure CIS and VAT are clearly itemised to avoid disputes

---

🔹 4. Follow Up on Outstanding Invoices

• Set up automated reminders (Xero, FreeAgent)
• Chase unpaid invoices at 7, 14, and 30 days
• Use tools like Chaser or GoCardless for recurring payments

---

🔹 5. Manage Expenses Tactically

• Negotiate longer supplier terms (30–60 days)
• Buy materials just in time—not months early
• Use trade credit accounts or business credit cards where appropriate

---

🔹 6. Monitor Job Profitability

Jobs may look busy—but are they cash-positive?

• Break down each job: materials, labour, overhead
• Review the margin vs the forecast weekly
• Flag problem projects early

---

🔹 7. Plan for VAT and Tax Bills

• Use a separate savings account to ring-fence VAT and CIS deductions
• Don’t rely on “leftover” cash at quarter-end
• Consider quarterly tax reviews with your accountant

---

🔹 FAQs

What’s the difference between profit and cash flow? Profit = money on paper after costs. Cash flow = the actual money you have to pay bills. A profitable business can run out of cash and fail. How can I finance temporary cash gaps?

• Invoice financing
• Short-term loans
• Asset-based lending (against vans, tools)

How often should I review cash flow? Weekly if you’re growing, monthly at a minimum. Use automated tools to save time.

---

🔚 Final Thoughts

Strong cash flow keeps your business running, your team paid, and your clients confident. With proper systems and forecasting in place, UK contractors can weather delayed payments, unexpected bills, and scale with confidence.