Cash flow

Paid a year upfront: how much of that cash can you spend?

Anna Stafford, AI Accounts. 9 November 2026

When customers pay a year in advance, January’s bank balance looks brilliant. Here’s how to work out how much of it is actually spare, with the sums shown.

£293,000 in the bank at the end of January, and only £80,000 of it spare for the whole year.

That’s a made-up business, which I’ll call Example Ltd. The shape will be familiar if you sell annual contracts, retainers paid in advance, software licences, memberships or training paid for at the start of the year. The money arrives in one go. The work, and the costs, carry on for twelve months.

The numbers

Example Ltd sells annual contracts worth £240,000 a year. Customers pay in January. It’s VAT registered, so it invoices £288,000: £240,000 plus £48,000 of VAT at 20%.

Its costs (salaries, rent, software, suppliers) are £15,000 a month. It starts the year with £20,000 in the bank.

By the end of December it has £80,000. That’s the £20,000 it started with plus the year’s £60,000 profit (£240,000 less 12 x £15,000).

Two claims on January’s cash

Two lots of January’s money already belong to someone else.

The first is VAT. For an advance payment, the VAT tax point is the earlier of the date you issue a VAT invoice and the date you’re paid. So the £48,000 goes on the return for the quarter the money arrived in. For Example Ltd, with VAT quarters to the end of March, that’s paid in May.

The second is the work. On 31 January, Example Ltd has been paid for twelve months and has delivered one. In the accounts, £220,000 (11/12 of £240,000) sits as deferred income, a liability, because it hasn’t been earned yet. In cash terms, the next eleven months of costs, £165,000, still have to be paid, with no more contract money due until next January.

And £55,000 of that £80,000 is profit the business hasn’t earned yet. Only January’s £5,000 has been earned so far.

Where it goes wrong

Say that in February the owner spends £100,000 on a hire brought forward, a van and a bigger dividend, because the bank shows £278,000 and it feels safe.

Example Ltd is overdrawn in November, two months before the renewals arrive. Sales were fine. The February spending just used money the business needed for October to December.

The trade-off

Being paid upfront is still very good for cash. It’s interest-free money from your customers, and you’re rarely chasing invoices. I wouldn’t tell anyone to move annual customers to monthly billing just to make the bank balance more honest.

The risk is the renewal. Example Ltd’s whole next year depends on one month. If a fifth of customers don’t renew, £57,600 (20% of £288,000) doesn’t arrive next January, and the business finds out when its bank is at its lowest point of the year.

There’s also the question of how much to hold back. Holding all of it is safe but slow, and if you’re growing you may want some of that cash working for you. That’s a judgement only you can make, but make it with the numbers in front of you, not the bank balance.

Running it on your own numbers

1. Start with your bank balance today.
2. Take off the VAT you’ve collected and not yet paid to HMRC.
3. Work out how many months of work you’ve been paid for but not yet delivered, and take off what it’ll cost you to deliver them.
4. Take off anything else already committed: this month’s payroll, tax bills, loan repayments.
5. What’s left is what you can make decisions with. A 13-week cash forecast then tells you whether it’s still there at the low point.

The number to look at this month

Do you know what your bank will look like the month before your renewals come in?