Beware of the those large cash hits

July 7, 2012

One of our services that we often provide is cash flow forecasting.  Cash is the lifeblood of any business, the oxygen.  With it, you are in business, without it, you’re not. 

Cash flow forecasting could be fairly straightforward.    You know when you are paying your suppliers, so what’s the big deal?  Even after throwing in the uncertainty of when your customers will pay you, (you can do a decent job of estimating it) everything else isn’t that complicated except one for one thing that always throws the cash flow forecast out.

It’s VAT

Firstly, you have the VAT difference to the numbers.  In a profit and loss account you have the numbers net of VAT.  So its shame you can’t just copy and paste the profit and loss accounts numbers into a cash flow forecast.  But you can’t, because for a cash flow forecast you have to add on VAT, on to the sales and the purchases and this makes a difference – a 20% difference.  This on a tight cash business could mean the difference between winning and losing.

Secondly, you have the VAT payments going out every quarter.  These throw the cash flow forecast out because a) they are usually large payments and b) they are notoriously difficult to estimate with any great accuracy.  When we complete cash flow forecasts we work out the VAT payment based on the sales and purchases in a very detailed way.  Without the calculation,  it’s a number which is hard to guess.  What makes the VAT payment difficult for business is that you are holding the government’s money for 3-4 months before paying it over.  Without a cash flow forecast, a business can get giddy with the cash balance and I’ve seen disastrous consequences to spontaneous business spending before a big VAT bill.  Generally speaking a higher bank balance will mean a higher VAT payment a month or so later.

So…..beware of those cash (VAT) hits.


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