Christmas Holidays are just around the corner providing a much needed break for many Kiwi's.
However, this period can also be a cash flow nightmare for the business owner. Some businesses also have an annual shutdown over Christmas and New Year which means not much of anything is being earned. Staff are paid annual entitlements and business expenses still need to be paid, so cash flow can be tight into the first few months of the New Year.
Despite all of this, "cash out flow" continues with accounts to suppliers due 20 January, provisional tax due 15January, GST due 15January and PAYE also due 20January which will include tax on annual leave entitlements paid in December.
And we all know what happens if a business doesn't pay its suppliers!
On top of that, if IRD isn't paid on time they will charge interest at 8.4% plus late payment penalties of 5% in the first month and 1% every month thereafter on unpaid tax and penalties.
Planning is the key to getting through this period which is best done sometime before hand. I'm also hearing from a number of businesses that theyr'e busier than in past years, which correlates to what we are hearing from Bank and Government economists.
As it was when the economy was slowing down, it also applies when the economy is picking up.
A good solid Financial and Cash Flow Forecast that is reviewed at least monthly to actual results is one of the best tools in the business toolbox. This enables both the business owner and their accountant to really understand where and how much the cash humps and hollows are likely to be, plan for them and also to plan for tax this year and next.
If you know how much cash you're going to need in the future, you can start planning for it in the present.
However, a Financial and Cash Flow Forecast will not help now if it wasn't done earlier. Some of the remaining choices for business owners are raising a bit of temporary finance which may mean talking with your Bank Manager or finding another financier which could include debt factoring or financing with Tax Management NZ (TMNZ).
I don't recommend using IRD as a source of finance for unpaid tax or to cover a working capital shortfall, as this has to be the most expensive form of finance and in itself could bring the business to its knees. Not only that but as an accountant I must add that late payment penalties aren't tax deductible.
So what is TMNZ all about?
TMNZ can help businesses overcome the problem of their provisional tax due (not PAYE or GST) by delaying the payment to a date that better suits the business cash flow. However, it is still a finance option and the interest rate is from 5.4% but is a lot less than what the IRD will charge plus penalties. Interest payable to TMNZ for this finance is tax deductible.
At PKF Poutsma Lemon Limited we have found TMNZ is a good way to assist clients with tax due to save IRD interest and penalties or to assist over the cash flow hollows.
Temporary overdraft facilities, alternative financier's or using TMNZ are a quick fix to an immediate and very pressing problem but they are not a long term solution. Long term solutions come from good business management and one of the very important tools in the business owners tool chest is a good strong Financial and Cash Flow Forecast that is reviewed at least monthly against actual results.
If you would like to discuss any of the above please contact Alison at the Kerikeri office on (09) 4077142 or email firstname.lastname@example.org.