Cash plays a critical role in promoting the overall health of an enterprise. It is imperative for a business owner or entrepreneur to ensure that there is sufficient cash in the business. Having cash ensures that the business is capable of meeting its financial obligations on time and also to grow. Such obligations include business running costs such as salaries, rent and other overheads and taxes. The aspect of timely payments is important to management of business cashflow and profitability. This is because late payments usually attract penalties and interests which eat into profits.
Cash Flow Projection and Taxes
The first step in the process of profitably managing cashflow in a business is preparing a cash flow projection. A well-done cash flow projection gives important advantages to the business owner. These advantages include the ability to know the correct cash position throughout the planning period before hand. If, for example the projection is for the whole year, the entrepreneur is able to know from January the amount of revenue to expect in June.
The ability to see ahead enables the business to anticipate fluctuations and plan accordingly. Important payments like taxes can effectively be planned for before their due date avoiding profit-draining penalties. Where necessary, lenders can be negotiated with in case difficulties in payment are foreseen from the cashflow projection. Major activities related to the business such as purchase of stock are also informed by cashflow projections.
Taxes are an important part of cash flow management. Knowing which taxes a business is required to pay at what time is critical. This is because being tax non-compliant ends up being a big problem for any business. The type of tax to register for is dependent on the model of business in which the enterprise is engaged. Every business should have a tax file number for which it is legally required to apply on establishment. After registration, the entrepreneur or company as the case may be would require to follow up on the applicable specific taxes that apply to them. One of the taxes that apply to many businesses is the Goods and Services Tax commonly known as GST.
GST, a broad-based tax, is charged at a rate of 10% on goods and services. If a business exceeds turnover of $75,000, it is required by law to charge GOST on its customers and forward the proceedings to the Australian Tax Office. Having knowledge of this tax is important for cash flow management. If the business does not charge this tax on the customer, it will still be required to submit the amount commensurate to goods or services sold. Such a situation would eat into and possibly eliminate the business’ profitability. Requirement for registration is for businesses that have a turnover or a projected turnover of $75,000.
There are many other taxes whose management would have an impact on cash flow and on profits. These include: Payroll Tax, Pay As You Go and Fringe Benefits Tax. Other statutory obligations such as superannuation for the business owner and employees should be appropriately planned for. Management of invoices and receipts is another important aspect of cash flow management. Every business should have in itself the capacity for at least simple book keeping to help it handle invoices and receipts.
Ensuring Your Business Is Profitable
Cash flow management is paramount to any business’ survival and expansion. A majority of business owners venture into business in areas where they knowledgeable. Thus, they understand the mechanics of providing goods and services on a day to day basis. This however, does not mean that all business owners understand the structure and impact of long term projections, taxations and other accounting activities. In order to bridge this knowledge-gap, get Femia Accountants to help, as we are experts in small business accounting.
Contact our office today on 9316 4500 or book a time to meet with us.