How many months could my business survive with no new income?

Short answer: Take the cash in your bank today, subtract every pound of tax you owe but have not yet paid, then divide what is left by what goes out each month whether you trade or not. The answer is the number of months your business survives if no client pays you another penny. Most owners have never worked it out.

Why does a fire drill work when a fire plan does not?

Every boarding school runs a fire drill at the start of term. Usually at six in the morning, usually in the dark, and nobody enjoys it. That is rather the point.

The drill exists because a plan on a wall proves nothing. What the school wants to know is whether a hundred and fifty teenagers can get out of a building and be counted in the right place while half asleep. Every drill finds something. A door that sticks, a register that is out of date, a new member of staff who did not know where the assembly point was. None of those faults were visible the night before. They surfaced because somebody tested the thing cold.

Businesses have the equivalent faults and almost nobody tests for them. You have an accountant, a bank, a spreadsheet somewhere. That is the plan on the wall. The drill is the act of finding out whether any of it holds when the money stops.

And businesses get one thing the school does not. No warning. Nobody rings a bell in January to tell you your largest client is leaving in March.

What is the one number a financial fire drill produces?

One question, four steps. It takes about an hour and you can do it today.

1. What is actually banked. Not the figure in your head, the figure on the statement this morning, across every account. Include the deposit account you forget about. Exclude the overdraft facility, because a facility is somebody else's money and it can be withdrawn.
2. Take off the tax you owe. The VAT sitting in the account for a quarter that has not been paid yet. The PAYE and National Insurance for this month. The corporation tax accruing on the profit you have already made. This money is in your bank and it is not yours. Most cash surprises in small businesses are really tax surprises.
3. Count what leaves whether you trade or not. Salaries, rent, rates, insurance, software subscriptions, the finance agreement on the van, the loan repayment. Not your variable costs, because those fall away when the work does. The fixed monthly outgoing is the number that keeps running when everything else stops.
4. Divide. Step one, minus step two, divided by step three. That is your months.

Owners regularly guess six and find three. The gap is almost always the tax at step two, and the shock is useful, because it is the first time the money in the account and the money available to spend have been treated as different things.

Why does the tax figure change the answer so much?

Because collected tax looks exactly like revenue in a bank balance. VAT you have charged, PAYE you have deducted, and corporation tax on profit already earned all sit in the same account as your own money and look identical on the app.

A business running a quarterly VAT cycle can be holding a meaningful sum that belongs to HMRC, and the balance looks healthiest the day before it goes. Making a decision on that balance, a hire, a vehicle, a bigger office, is where a lot of otherwise sound businesses get into trouble. Nobody was reckless. They just read the wrong number.

Why do my year end accounts not answer this?

A bookkeeper records what happened. That is control. An accountant files what happened. That is statutory. Both of those jobs are essential and both look backwards on purpose, because that is exactly what they were engaged to do and a good one does it properly.

A set of accounts filed months after the period closed is not late. It is a record. The trouble with a record is that it cannot tell you how long you last from today, because it describes a position that has already stopped existing.

Nobody sits between recording what happened and filing what happened, deciding what happens next. That gap is where your months number lives, and it is the seat that is usually empty in an owner managed business.

What else should the drill test?

Three more, an hour each.

The late payment test. Take your largest customer and move their payment out by thirty days. Work out which week you run short and what you would actually do about it. Owners who run this once behave differently about credit control forever.

The absence test. Assume you are unreachable for two weeks with no notice. Who runs payroll, who approves the VAT return, who talks to the bank, and do they already have the access to do it without you. Write the names down. A missing name is the finding.

The mid month test. Pick a date in the middle of last month and prove the bank agrees to the ledger on that date. Not at the period end when everything has been tidied. Mid month, cold, the way a real crisis would find you.

What usually goes wrong the first time?

The months number comes out lower than expected, and the difference is the tax.

One person turns out to be the single point of failure for something nobody had classified as important, usually the bank authorisation, and usually that person is the owner.

And the fixed cost list is longer than anyone believed, because subscriptions accumulate quietly and nothing ever forces a review.

None of these are disasters when a drill finds them. All of them are disasters when a bad quarter finds them.

How often should I run one?

The months number monthly, because it moves fastest and takes ten minutes once the first hour is done. The full set twice a year.

Put the dates in the calendar now, while it feels sensible, rather than agreeing to do it at some point. A drill that is scheduled happens. A drill that is intended does not.

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