The Worst Advice About Cashflow We’ve Ever Heard
If you have a Cashflow Challenge
Definitely Don’t Do This!
Businesses often engage in well meaning but sadly misguided activities, but this week there was a Doozie that took the cake. It can be hard to know what to do when cashflow is tight, but we recommend you NEVER put this on your To-Do List!
The Worst Cashflow Advice: Don’t pay your Taxes
This was the advice from a client’s bookkeeper – “let’s not pay our tax!”. So for several years my client has accumulated larger and larger tax debts as they continued to meet their lodgement requirements, but not hand over any cash. Now, your “tax man” may be ladies, or called the Tax Office or Inland Revenue Service or Department of Tax or whatever, but regardless of how your Government collects its taxes there are several reasons why this is such bad advice, here are my top 2:
A. You’re messing with the Government
To state the obvious – the Government is much bigger and more powerful than all of your other Creditors.
If you are in the habit of paying your suppliers late, or not paying them at all – you will probably get away with it provided your suppliers are small and don’t have the time and cash to chase the debt through costly court proceedings. On the other hand the Government is strong they have plenty of time and money to collect every cent you owe. How else will they be able to afford to provide hospitals, and roads, and police, and all those other things taxes pay for?
Governments create their own methods of preferential standing and in many countries (especially Australia) are able to instruct your Bank to hand over the money directly. Garnishing your heard-earned is common practice – the Tax office simply sends a letter to your bank with instructions for the transfer and the bank must comply. Now this can REALLY mess with your cashflow, one day you seem to have plenty of money, the next it is all gone!
The other big problem with a Garnish is it immediately impacts your credit rating – the bank is notified by the Tax Office about your “financial non-compliance” and will generally “demote” you to a bad payer category – with related interest increases; even if you have never been overdue with a single repayment.
B. Unpaid Taxes are not a Free Source of Finance
Government’s charge interest, fines and penalties for late taxes.
This is not free money; the goal is collect taxes so they can continue to Govern, their goal is not to provide a finance service to your business – that is what banks are for. Generally unpaid taxes will attract an interest rate 5% – 15% higher than normal borrowing costs. This is most likely less than your credit card rates, but much higher than your overdraft. So remember, this is an expensive form of finance.
Also a word of warning, the interest is most likely levied monthly, and interest is charged on interest too, so it is best to reconcile any outstanding balances monthly and reflect all the charges in your accounts so that you have transparency about the real costs. The client mentioned in the beginning was oblivious to the penalties of not paying the taxes because his bookkeeper didn’t ever include the interest and penalties in the accounts – just because it isn’t in your books, don’t get tricked in to thinking it is FREE money.
How do we get avoid taking such bad cashflow advice?
In a perfect world or cashflow would always do just that – flow nicely about. But the real world isn’t quite so perfect; cashflow blocks and challenges happen to the best of us, and when they do having the right approaches to solving the problems can make or break a business.[/twocol_one_last]Short term financing can be necessary, but watch out for nasty pitfalls such as those covered here – QUICK CASH FLOW FIXES – 3 Pitfalls to Avoid. These apply just as much to using your credit card as the Tax office for cashflow relief.
Payment plans, where you negotiate with your Government to pay down the overdue amounts over time in small instalments are generally the most cost and effort effective – as long as you stick to the plan the Revenue Collectors will leave you alone (although still charge you interest the fines and penalties are reduced)
If you are looking for alternative cashflow solutions to work on in meantime these previous posts might be helpful:
Did you ever receive really bad cashflow advice?
Share with us all, in the comments below so we can sympathise, and learn!
Now that you have a taste of what we can do… here are some more options to improve your business profits: