TIPS FOR IMPROVING CASH FLOW
Profitable businesses fail regularly due to poor cash flow. Finding a market and selling your goods or services is only half of the battle. A sale isn’t really a sale until you have the cash in the bank. And while you are waiting for your customers to pay, you still have to service payments to your suppliers. In today’s difficult economic climate, good cash flow management is more important than ever. Good cash flow management is all about three things:
• Slowing the speed of cash outflow to your creditors
• Increasing the speed of cash inflow from your customers
• Reducing the amount of time that cash is tied up in holding stock
TIPS FOR SLOWING THE SPEED OF CASH OUTFLOW TO YOUR CREDITORS
1. USING ROS TO FILE RETURNS AND MAKE TAX PAYMENTS
Apart from the administrative conveniences of filing your tax returns online, there is also a cash flow advantage to doing so. The Revenue grant an additional few days for the payment of most taxes filed and paid online via ROS (Revenue-Online-System).
An additional two to three weeks are granted for income tax payments when returns and payments are made online.
The Revenue also recently introduced an extension for the payment deadlines of VAT, PAYE and RCT when returns are filed and paid online. Previously, the deadlines for PAYE and RCT were the 14th of the month and the deadline for VAT was the 19th. All of these deadlines have been pushed out to the 23rd of the month for tax returns filed and paid online. It is crucial to be aware however that these deadlines are only available when you both file AND pay online. You cannot pay by cheque or other methods when you wish to avail of the extended deadlines.
More information regarding these extended deadlines is available in the Revenue’s e-Brief No. 10/09.
2. REGISTER FOR VAT ON A CASH RECEIPTS BASIS
Another Revenue incentive that all small businesses should avail of is to opt to account for VAT on a cash receipts basis. There are qualifying criteria for this option but the majority of small owner managed businesses will meet this criteria. A business may opt for the cash receipts basis for VAT when:
(i) Turnover does not exceed €1,000,000; OR
(ii) 90% of your turnover consists of the supply of goods or services to persons who are not registered for VAT.
The significant advantage of accounting for VAT on this basis is that you do not have to pay over your VAT to the Revenue until you have actually received payment from your customers. The alternative is accounting for VAT on an invoice basis, which means that you pay over the VAT as you issue invoices to your customers, regardless of when you actually receive any payment from your customer.
If you are currently set up to account for VAT on an invoice basis (the default basis for which the Revenue will register your business unless you elect otherwise) and believe that your business is eligible for the cash receipts basis, you may contact your local Revenue office in writing to request a switch.
Further information in relation to this is available on the Revenue’s website by clicking here.
3. USE HIGH INTEREST REGULAR SAVER ACCOUNTS TO MEET YOUR INCOME TAX LIABILITY
If you are a sole trader, the use of high interest regular saver accounts is a good temporary home for the cash that you will require to pay your annual income tax liability. It is advisable for all sole traders to set aside a portion of their earnings on a regular basis to ensure they will be able to meet their income tax liability when it falls due. It can be too tempting and too easy in your first year of trading to spend all the money that you earn in the belief that you will be able to fund your tax payments from future earnings. Far too many people are caught out by this either because their trading activity isn’t as healthy as expected or because they are unaware of preliminary tax requirements which can have the effect of a double tax whammy at the time of your first income tax return.
The Revenue offer direct debit facilities to enable individuals to make their tax payments evenly over the year. Paying by monthly direct debit is an advisable option for smoother cash flow. However, a far better option is to set up a standing order to a high interest regular saver account with a bank. This will have the same effect on smoothing your cash flow but with the advantage over the Revenue’s direct debit system that allows you to earn a little interest on your cash before you are required to pay it over to the Revenue each October 31st.
TIPS FOR INCREASING THE SPEED OF CASH INFLOW FROM YOUR CUSTOMERS
1. MANAGE YOUR DEBTORS
(a) Ensure your own bookkeeping is kept firmly up to date so you know who owes you money at any particular time.
(b) Unless you are business that requires payment for goods and services upfront, ensure you sit down and do your own sales invoicing on a frequent basis. Whatever payment terms you offer your customers, they are not required to pay you until you issue an invoice to them. The longer that it takes you to issue sales invoices, the longer it will take for cash to come in.
(c) Consider your customer’s credit history before making a sale. Attempting to chase a customer through the courts for an unpaid debt is all too often a prohibitively costly activity for the vast majority of SMEs. It is far better to do some ground work in establishing the creditworthiness of your potential customer prior to making the sale. Many businesses no adopt the use of credit references from other suppliers to your customer.
Requesting payments up front is a reasonable demand of customers with poor credit ratings and slow payment record. Don’t be afraid of losing the customer by stipulating this if you have genuine concerns over their ability to settle their debt to you when it becomes due. Remember a sale is not really a sale until you have the cash in the bank. And the chances are that your competitors would make the same demands of the customer if they are also adopting good cash flow management techniques. Another alternative is asking customers to build up a payment history with you, by providing only a very low credit limit for the first few months. If you find that the customer has difficulties keeping to their credit terms over this initial period, do not increase their credit limit.
2. EXERCISE YOUR RIGHT TO CHARGE INTEREST ON LATE PAYMENTS
The European Communities (Late Payments in Commercial Transactions Regulations 2002) came into effect on 7 August 2002 to help combat the frequency of late payments in commercial transactions. The legislation allows for penalty interest to be charged when payments are not made within 30 days, unless otherwise specified by a contract between the two parties.
Late payment interest is charged at the ECB rate plus 7%. The ECB rate in place at 1 January and 1 July each year is taken as the relevant ECB rate for the following 6 months.
More information regarding the current rates and examples of how to calculate the interest due is available from the Department of Enterprise, Trade and Employment website at http://www.entemp.ie/enterprise/smes/latepay.htm
3. OFFER EARLY PAYMENT DISCOUNTS
One method of encouraging customers to pay on time is to offer an early settlement discount e.g. a 5% discount if the bill is settled within 14 days. Obviously you need to build these discounts into, or be aware of their effect on, your profit margin.
4. INVOICE FACTORING
There has been an increase in the number of invoice factoring services entering the Irish market. In short, invoice factoring is a method to immediately generate cash from your sales invoices without waiting for your debtors to make the payment. Essentially, you are selling your debtors at a discount to an invoice factoring company who will pay you upfront for them and then chase your debtors for their payment.
Each invoice factoring company will have slightly different terms and conditions so it is advisable to research each carefully. Two of the most important considerations to be aware of are recourse and non-recourse factoring and also the fees that these companies charge you for the service.
As there is a fee for invoice factoring, you need to ensure that the benefits of receiving cash today outweigh the cost of this service.
TIPS FOR REDUCING THE AMOUNT OF TIME THAT CASH IS TIED UP IN STOCK
1. HOLD AS LITTLE STOCK AS POSSIBLE
Holding excessive stock keeps cash tied up as you have paid your supplier for the goods but have not yet sold it. You should review your stock levels and aim to hold stock for the least amount of time possible between purchasing goods and selling them on.
2. DISTINGUISH BETWEEN SLOW AND FAST MOVING STOCK
It is good to be aware of which stock is slow moving and to particularly ensure that you hold the minimum amount of slow moving stock as possible. You may consider a sale or special promotion to move excess slow moving stock.
3. LEARN ABOUT AND APPLY ‘JUST IN TIME’ (JIT) STOCK CONTROL METHODS
Just In Time (JIT) stock control methods aims to reduce costs by cutting stock to a minimum. Stock is delivered when needed and used immediately. To avoid the risk of running out of stock, JIT stock control methods employ a number of techniques to assist with the efficient management of stock levels, including Economic Order Quantity (EOQ). Depending on the size of your business a manual stock control system may suffice. Other businesses may find it useful to purchase a computerised stock management system.