Below are some useful tips on how to start creating and maintaining good habits within your business. Implementing these good habits will help alleviate some potential pitfalls in the future. Business is dynamic and ever changing, so you have to be ready for anything and have the ability to adjust and react accordingly but a little bit of a safety net goes a long way too!
Relocate at least 10% of each invoice into a savings account
None of us appreciate the nasty surprise that comes along with provisional tax payments in August and February every year and most small business owners don’t take this into consideration during the year or when working out their finances. Get into the habit of building in at least a 10% allocation on each invoice/quotation to put aside in a separate account when payment arrives. That way, by the time an Income tax payment is due, you will have the funds available thereby easing your cash flow burdens.
Make sure to claim all legal expenses accurately
Remember that the standard income tax rate on a registered company is calculated at 28% of Net Profit. It is important to keep and accurately record all claimable expenses in order to minimise your tax liability. A minimum saving of 10% on each invoice should cover this but, in some circumstances, a higher percentage would need to be saved. At the end of the day, if your tax liability is lower than your savings, you have the money to pay your tax AND you have extra cash to invest the following financial year to purchase new assets, safeguard against lean months etc. So, the moral of the story is “the more you SAVE, the better!”
Relocate your Vat to another account
The current Vat rate is 15% and much like above, businesses experience cash flow problems when they don’t accurately accommodate their Vat payments. Remember that although Vat is charged on your invoice, THIS IS NOT YOUR MONEY! Small businesses get into a bad habit of using the Vat portion of their money as everyday cash flow and then not having enough funds to pay their Vat bill later on. Put the 15% Vat portion of every invoice in a separate account linked to the business account so that you are not tempted to use it. Bear in mind that you have input Vat to offset against your final Vat payment, but making the habit of putting the full 15% away safeguards you against unexpected high Vat bills. Most small business are on a 2 month Vat cycle so invoices raised at the end of the Vat cycle can fall due before the invoices are actually paid which can cause massive cash flow problems. If you put this good habit into practice you should always have a surplus in your VAT account which can accommodate these unforeseen high Vat bills.
Ask your bank about linked savings accounts
Most banks offer pocket savings and/or transmission accounts directly linked to your business account which do not have monthly account fees. Ask your bank for the most cost-effective solution so that you do not open up new accounts that attract more bank fees. These accounts usually do not allow you to transact directly with external parties but only for transferring between your existing accounts – so they are purely a subdivision mechanism for your cash.
Putting the above mechanisms in place and the following the advice accurately and consistently, should alleviate some cash flow pressures.
Written by Derryn Brigg, Business Advisor for ActivPro Business Solutions, 28 January 2019