In 2019, a food delivery startup went bankrupt with €2.3 million in profit. Not losses — profit. The accounting profit was solid, but the cash account was empty. A client paid late, a supplier demanded a prepayment, and the company couldn't pay salaries. No law was broken, but no one was watching cash flow.
This scenario repeats itself every year in small businesses. Profit grows, but cash runs short. Owners wonder — "how is that possible when we have so much work?" The answer lies in cash flow management — a skill that Latvian accounting software doesn't teach, yet determines whether a business survives.
Why Profit Is Not Cash — The Cash Flow Paradox
Accounting is based on the accrual principle: revenue is recognised when an invoice is issued, not when money arrives. Expenses are recognised when an invoice is received from a supplier, not when paid. Profit is the difference between these two figures — a theoretical number that does not necessarily match the cash balance in your account.
A simple example: in January, you issue an invoice to a client for €15,000 with a 45-day payment term. In the same month, you must pay suppliers €7,000, salaries €4,000, and VAT €3,000. The profit calculation looks great for January — revenue €15,000, expenses €14,000, profit €1,000. In mid-February, the cash account is minus €14,000 because the client hasn't paid yet, but bills need to be paid now.
This phenomenon is called the cash flow gap — the period during which you have paid for costs but have not yet received payment from the client. The gap can last 30, 60, or even 90 days. And if it is larger than your available cash reserve, the company is insolvent — even if the profit calculation shows the opposite.
The 13-Week Cash Flow Forecast — How to Build It
Banks and investors demand 12-month forecasts, but operational management requires a shorter, more accurate tool. A 13-week (one quarter) cash flow forecast is the practical minimum for any small business.
Why 13 weeks instead of 12? The thirteenth week provides coverage into the next month and helps identify problems that can arise at the end of the quarter when multiple payments accumulate at once.
Building the forecast step by step:
Opening balance. Record the cash balance in your account today. A real balance, not an imagined one.
Cash inflows. List all expected revenues week by week:
Client payments according to invoice due dates
Prepayments from new orders
VAT refunds from the SRS
Any other income
For each receipt, indicate a realistic date — not an optimistic one. If a client usually pays 10 days late, record the payment with a 10-day delay. The forecast should reflect reality, not wishes.
Cash outflows. List all planned payments:
Supplier invoices with their due dates
Salaries (gross + social contributions)
Tax payments (VAT by the 20th, VSAOI/PIT by the 23rd)
Rent, utilities, subscription services
Loan principal and interest payments
Net cash flow. Subtract outflows from inflows. This gives you each week's net result — positive or negative.
Closing balance. Add the opening balance to each week's net cash flow. If the closing balance becomes negative in any week, you have identified a problem — and you have time to act before it becomes a crisis.
Invoice Payment Terms — What to Set and How to Get Paid
One of the most effective levers of cash flow management is invoice payment terms. The longer the term, the longer your money sits with the client rather than in your account.
Standard Terms and What They Mean
7 days — aggressive, suitable for small clients or low‑value services. Large clients often can't meet such a short term due to internal processes.
14–21 days — balanced for most B2B transactions. Gives clients enough time for processing but doesn't let cash freeze for months.
30 days — the traditional standard. If you work with large corporations, negotiating a shorter term is nearly impossible.
45–60 days — common in export transactions and large projects. Here the cash flow gap is largest, and you need to plan accordingly.
How to Ensure Invoices Are Paid on Time
Send the invoice immediately. Delaying invoicing is a common mistake — every day the invoice sits in your outbox, the client does not consider it their delay.
Include payment terms and bank details on the invoice. Obvious, but surprisingly many invoices are issued without a clear due date.
Automatic reminders. Most accounting software allows you to set automatic reminders 3 and 7 days before the due date and immediately after a delay.
Offer a discount for early payment. For example, a 2% discount if the invoice is paid within 7 days. 2% per month is 24% per year — cheaper than a bank credit line, and it motivates clients to pay faster.
Overdue Payment Management — How to Recover Money Without Losing the Client
Overdue payments are inevitable. On average in Latvia, about 15–25% of B2B invoices are paid after the due date. The problem is not the overdue payments themselves, but how you respond to them.
An Effective Late Payment Management Sequence
1–7 days past due: a polite email reminder. "Has the invoice been lost? Do you need a resend?" An approach that assumes it's an administrative error rather than bad faith preserves relationships.
7–14 days: a phone call. Emails can be ignored; calls are harder. Ask whether there is any problem with the invoice that you can help resolve.
14–30 days: an official reminder with a warning about late interest. In Latvia, the statutory late interest rate is 6% above the ECB refinancing rate, unless otherwise specified in the contract.
30+ days: a final warning before debt collection. Clearly state that after a certain date, the matter will be handed over to a collection agency.
When to Involve Professionals
If an invoice remains unpaid for 60+ days and the client does not respond to reminders, it is time to consider engaging a collection agency or legal action. However, weigh the costs — for small invoices (up to €500), collection costs may exceed the amount recovered.
Building a Cash Reserve — How Much Is Enough
Financial advisers recommend holding a cash reserve that covers 3 to 6 months of operating expenses. For a small business with monthly expenses of €8,000, the safety reserve should be €24,000 to €48,000. That sounds like a large number, but it doesn't have to be built in one month.
How to build a reserve gradually:
Set aside 5–10% of revenues each month into a separate account — untouchable.
Use seasonal surpluses. If revenues in July–August are significantly higher, direct that surplus to the reserve.
Do not regard the money sitting in your VAT account as a reserve — it belongs to the state, not to you.
Seasonal Business — How to Plan for Low‑Revenue Months
Restaurants in Jūrmala in winter, accounting firms in summer, retail after Christmas — seasonality is a reality for many small Latvian businesses. Planning here is critical.
Calculate your minimum monthly expenses. Salaries, rent, taxes, utilities — everything that must be paid regardless of revenue.
Identify the low months when revenues fall below minimum expenses.
Calculate the total funding deficit for those months. For example, if January, February, and March each have revenues €3,000 lower than expenses, the total deficit is €9,000.
Build a reserve during the high months to cover this deficit. If July through August each have a surplus of €2,000 per month, you will accumulate €12,000 over six months — more than enough for the winter period.
When to Use a Credit Line Instead of Waiting for Invoices
A credit line is a tool, not a life raft. It is used to bridge short‑term cash flow gaps, not to cover losses.
When a credit line is justified:
You have a signed contract with a client and an invoice has already been issued, but the payment term is 45–60 days.
You have a rapidly growing business where working capital is frozen in accounts receivable but order volumes are increasing.
A seasonal deficit that is expected to be covered by next quarter's revenues.
When a credit line is not a solution:
To cover losses. If expenses consistently exceed revenues, a credit line only postpones the inevitable.
To finance long‑term assets. For equipment and machinery, use a loan, not a credit line.
Latvian banks typically grant credit lines secured by accounts receivable or with ALTUM guarantee support. Interest rates range from 5% to 12% per annum depending on the company's credit history and collateral.
Cash flow management is not a one‑time task — it is a weekly habit. The 13‑week forecast, strict invoice discipline, and a sufficient reserve are the three pillars that will protect your business from the most common cause of death. Our team helps both with preparing forecasts and with accounts receivable management and reminder automation.
Last updated: May 2026. Information is based on generally accepted financial management principles and Latvian banking practice.
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