14 Oct 2014
VAT and tax bills don’t need to wreck your cash flow
Written by Doug D'Aubrey

As we have seen, poor cash flow management is possibly one of the biggest financial downfalls on the road to survival for any business, new or old, large or small. Cash flow management is a crucial element in the business planning stages and throughout the life of any business.

Perhaps one of the biggest issues that a business stumbles upon and which can cause devastating cash flow problems is the area of VAT and other large government tax bills.

Every quarter a chunk of money has to be found to pay your VAT bill. And every 12 – 18 months, money has to be found to pay for corporation tax. VAT and other taxes belong to the government, but what most of us do is to collect it in with customer payments, put it into our own bank accounts, and then spend it!

As part of a good cash flow management plan we need to account for these monies in advance. A sound idea is to set up a separate bank account for these taxes. At the end of each month, if that’s when you do your accounts, calculate the monies due for VAT and transfer them directly into this separate bank account. If you do your accounts weekly, then do this weekly. Leave this money there.

Interest rates nowadays are pretty low everywhere, but find an account with the highest rate possible and put the money in here. It’s the government’s money – not yours – but in this way, at least the government’s money will be working for you. After three months you will have accrued three month’s interest and made money out of the government!

At the end of the fourth month when you pay your VAT bill, you will have the cash ready to pay. You will have a sum of interest, and NO CASH FLOW PROBLEM!

You have to be pretty disciplined to work this, but once the habit is in place, it will reap the rewards. Of course, this system can be used for your other tax responsibilities as well, making you money all round!