Suddenly, debt collection is kind of a big deal. Especially if you’re registered for VAT. “Why,” I hear you ask. And let me just say, that I’m so glad you asked! I talk to myself far too much… Where was I? Oh yes! Here’s the thing, (and the thing of the thing, as the Irish say)…
You pay VAT on the invoices you have sent, irrespective of whether you have been paid by your clients. Hmmmm. Isn’t that a bit unfair? Well, from the government’s perspective, they don’t really care. The moment you invoiced you’ve identified some of their money and they would like it as soon as possible, thanks very much.
There isn’t a special customer service department where you can go and explain that your clients haven’t paid you. So, you don’t have the money to pay the Government, just at the moment, can they wait for a little and you’ll chase the client again pretty please?
So, let’s consider this fine state of affairs. You’ve sent an invoice for 15,000 plus VAT of 750, which hasn’t been paid. And the end of the VAT period is today. You have to add that invoice into the records and pay the VAT yourself. Imagine if you have a whole lot of invoices outstanding at the end of the period… say 75,000 worth. Then you have to front up with 3,750.
In all likelihood, you have no contingency budget for covering this. Most small businesses don’t do contingency budgets. They should, but they don’t. Actually, most small businesses don’t have budgets of any sort! And they have no clue about their cash flow either. Mainly because they hate numbers. They love making stuffed toys, homemade preserves, planning events, designing websites. But hate the numbers side of the business.
S’not really an option any more gentle readers! You have to learn the language of business, which is numbers. It’s critical to your survival.
So, in the instance we’ve mentioned where you have an unexpected lump of VAT to pay which you haven’t collected from clients, the impact on your cash flow can be quite extreme.
Especially if you’re living somewhat hand-to-mouth!
With that in mind, here’s a couple of observations. In no particular order, they are:
- If you don’t have a good bookkeeping/accounting system, you are dangerously exposed. Time to put on the long pants/fashionable skirt and join the senior school of professional business owners.
- You must have a good process for collecting overdue payments before the end of the tax period.
- You should create a contingency “pot” where you keep some dosh for emergencies like the ones described above.
Luckily, Businessmentals can help you with all of these. Ping us at over here to find out how we can ride to your rescue!