Most limited company owners look at their bank balance and feel one of two things: relief or anxiety. What they rarely feel is certainty. And that's because the bank balance is the wrong number to look at.
This is not a criticism. The bank balance is the most visible number in your business. It's right there at the top of your FreeAgent dashboard, your banking app, your mental model of how things are going. The problem is that it's incomplete — and for a limited company specifically, it can be significantly misleading.
The money that isn't yours
When you run a limited company, some of the cash sitting in your account was never really yours to spend. It arrived, it's sitting there, but it belongs to someone else.
The most significant example is VAT. If you're VAT-registered, roughly one pound in every six you invoice belongs to HMRC. It passes through your account, it inflates your balance, but on the next VAT return date it leaves. The company collected it on behalf of the government. It was never trading cash.
Corporation tax works differently but the effect is similar. It accrues quietly throughout your financial year based on your profitability, and then falls due nine months after your year end. There's no monthly reminder. It doesn't appear as a regular outgoing. It simply builds up in the background and then arrives as a significant liability.
Outstanding supplier bills are committed cash. You've received the goods or services. The invoice is sitting unpaid. The money will leave — the only question is when.
Add these up and the gap between your bank balance and your actual available cash can be substantial. For a profitable limited company turning over £150,000, that gap might easily be £30,000 to £40,000 at any point in the year.
What real headroom actually is
Real headroom is the answer to a specific question: if you settled every current obligation today — VAT, corporation tax, outstanding bills — how much cash would you have left?
That number is what you actually have to work with. It's what you can draw as salary or dividends without creating a future problem. It's what tells you whether you can afford to take on a new piece of equipment, bring in a subcontractor, or take a month off.
The bank balance doesn't answer that question. Real headroom does.
Why this matters more than it used to
The practical reason real headroom has become more important is the convergence of obligations. Quarterly VAT returns, corporation tax deadlines, and irregular invoice payment patterns can all land in close proximity. A company with a £40,000 bank balance might have £18,000 in VAT due in three weeks, £12,000 in estimated corporation tax, and £6,000 in outstanding supplier invoices. Real headroom: £4,000.
That's not a crisis — if you know about it in advance. It becomes a crisis if you're making decisions based on the £40,000.
The timing problem
The other reason real headroom matters is timing. Your bank balance is a point-in-time snapshot. Real headroom changes as deadlines approach and recede, as invoices are raised and paid, as the financial year progresses and corporation tax liability accumulates.
A company that looked fine in January can look tight in March — not because anything went wrong, but because the VAT quarter closed and the return is due. Understanding real headroom means understanding it dynamically, not as a single figure but as a picture that changes over time.
What good looks like
A limited company owner with a clear picture of their real headroom can answer these questions without hesitation:
- How much can I draw this month without creating a tax problem?
- Is the VAT due next month covered by current cash?
- If my largest client pays late, what does that do to my position?
- Am I on track for the corporation tax that falls due after my year end?
These aren't complicated questions. But they require looking at the right number — and the right number is not the bank balance.
A note on tools
FreeAgent and Xero show you accurate accounting data. They tell you what your VAT liability is, what invoices are outstanding, what your estimated corporation tax looks like. The information is there.
What most accounting tools don't do is synthesise it into a single, plain-English answer to the question that actually matters: what do I actually have right now, and what's coming?
That synthesis — turning raw accounting data into real headroom and explaining what it means — is what Strafi is built to do.