A profitable business can still experience serious cash-flow problems if money needed for tax has already been spent.
Corporation Tax, VAT and PAYE can represent substantial liabilities. Business owners may also face personal self-assessment payments.
These bills should not come as surprises. Rather than waiting for a tax liability to fall due, incorporate estimated payments into the business cash-flow forecast.
For example, a company can estimate Corporation Tax as profits accumulate rather than waiting until the annual accounts are completed. VAT liabilities can be estimated from accounting records and PAYE liabilities should be readily available from payroll information.
Some businesses find it helpful to transfer these estimated tax liabilities periodically into a separate bank account. This reduces the temptation to regard all of the money in the current account as available working capital.
Forecasting also allows different scenarios to be considered. What happens if sales fall by 10%? What if a major customer pays a month late? Will sufficient funds still be available for the next VAT or Corporation Tax payment?
Forecasts will never be completely accurate, particularly where profits fluctuate. They can nevertheless provide an early warning of a potential shortfall.
Knowing that a significant tax payment will be required in three or six months gives you time to prepare. Discovering the problem a few days before payment is due gives you far fewer options.
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Published by The NAS News Team
