More cash flow questions answered

Why are many businesses’ cash flow issues aggravated as a result of tax contributions?

If you are liable to make your second provisional tax payment at year end then it means that you made a taxable profit and should also have the cash available to pay the income tax on that profit, but often businesses do not seem to have the cash available, mainly because their profit is not realised in cash out of stock and debtors. That is why cash flow management is very important as you need to also convert your profits into cash.

It also often happens that in the quiet months the overhead costs such as rent, salaries and wages, insurance and utility bills remain the same and need to be paid, but the monies that flow through from trading activities are not adequate to cover these fixed overhead costs and then businesses eat into their cash reserves set aside for provisional tax payments.

This is a dangerous situation as the tax is due and payable as you made the paper profits. Cash flow planning to meet your commitments with SARS is essential and boils again down to the advice given above on how to handle stock levels, debtors, creditors and your bank account.

Why are many entrepreneurs often not close enough to the cash flow position of their business?

A daily update of your cash book is essential to know what your cash reserves are and how much room you have on the lines of short term credit you have on your bank account. Your bank balance at your bank is normally not your cash book balance, because some of your payments to creditors might not reflect on your bank statement yet.

You need to regularly reconcile between your bank balance and your cash book balance and follow up on the reconciling items. You cannot leave the most important number in your books solely in the hands of your people.

Cash is king and you hence need to keep tabs on what your manoeuvrability is when commitments to SARS and other creditors and employees need to be met. With no cash flow a business can go under even though it is making profits.