We all know that the number one reason that small businesses fail is due to poor cash flow. In the vast majority of cases, the business was doomed before it started due to a lack of start-up funds to get the business up and running and provide the financial resources to fund the business.
Having said that, the ongoing cash flow problem is manifested by a lack of money to pay the BAS when it is due. The key, of course, is to not be in that position in the first place.
Depending on your situation, there is one strategy that you can implement immediately that will keep you on track with money in the bank to pay the BAS on time all the time.
If you don’t have an outstanding tax debt
The No.1 strategy when you don’t have an outstanding tax debt is to put aside 10% of your income. The way to do this is to open a second business bank account and transfer 10% of the money you deposited into the bank account into this second bank account. I recommend that this is done weekly.
Now, I can hear you saying to me, “But that’s too much to put aside as I can claim the GST back on my expenses.” And yes, that is true. But the reason I recommend 10% is it means that you’ll also be putting money away that can be used towards paying your income tax liability too. Hopefully, you have an income tax liability and if you don’t, then the extra money you’ve saved may well come in handy for a major purchase in the future.
In addition to the 10% you transfer out of the main business account every week, if you pay wages, whether to yourself or other people, then at the time that you process the payroll, you need to also transfer the PAYG withholding and superannuation liability into the second bank account.
If your cash flow is too tight to transfer the PAYG withholding and superannuation on the same day as you pay the net wages, then total up these amounts for the month, divide by four and add that amount to the 10% you transfer each week.
If you do have an outstanding tax debt
Like those businesses who have their tax debt under control, you need to put aside 10% of your current income into a separate bank account. You will also need to put aside money for PAYG withholding and superannuation liabilities if you pay wages (see above).
In addition to this, you then need to factor in funding the outstanding tax debt. If you already have a payment arrangement in place with the ATO, identify how much you need to be saving each week to meet the agreed payments and add that to the figures you’ve calculated above.
If you don’t yet have a payment arrangement with the ATO, then you need to determine how much more money can you put aside each week over and above the 10% of money banked and the PAYG withholding and superannuation liabilities. When you have identified that figure, check how many weeks you would need to pay the outstanding liability. If this is less than 52 weeks, you should be in a good position to negotiate a payment plan with the ATO. If it is more than 52 weeks, the ATO is unlikely to approve the payment plan and you will need to consider how you can increase the amount via funding from other sources.
This one strategy will not only fund existing and outstanding tax liabilities, but it will also show you just how much money you have in the bank that is your money to spend within the business or to use to fund your wages or drawings. In addition, I have found that clients who have used this strategy reduce their stress levels and those that had outstanding debts often continue to put aside the higher amounts even after they’ve paid off the ATO and use this as a saving technique to fund larger purchases, as a buffer for tough months and as additional wages or drawings for themselves when they need it.
Whether you owe money or not, this one strategy will help you with the cash flow in your business. Put it in place and see how much of a difference it makes to you and your business.