Cash flow is the lifeblood of a business – it keeps the businesses heart pumping. Without cash, profits are nothing.
Here are the 5 keys areas that affect cash flow which you need to understand:
1. GST – The pluses and minuses of GST and Cash flow
Of course you pay GST on income from trading activities if your revenue is more than $60,000 a year. But the IRD also lists many other sources of revenue that are liable for GST – so ensuring you know what these are will be crucial.
2. Provisional Tax – Straightforward yet complex
Tax deadlines can be painful. They can be painful to meet, and they can especially be painful if you miss them, as the IRD charge penalties on late or underpaid instalments of provisional tax. It couldn’t be clearer. The IRD says, “We charge late payment penalties (LPPs) on all overdue payments”, so it’s incredibly important to understand what method you should use to calculate your provisional tax liability and frequency of payments.
3. Provisional Tax penalties
Punishment is painful, which is the whole idea. If you’re in business, you don’t want to be punished. However, if you screw up your provisional tax, you create the potential to be penalised by the IRD. It’s important to ensure the lines of communication are open with the IRD and you understand your responsibilities.
4. Annual Leave
When you pay tax, the effect on your business cash flow is obvious. A lump of cash goes out. The effect of annual leave, however, may be less apparent. You need to fully understand employees entitlements and how they impact cash flow.
5. Areas outside Tax
Accounting rules decide when transactions are recorded in your books. However, business reality decides when you receive or spend your cash. Other areas that you need to keep on top of if you are to maintain a clear picture of your cash flow are: accounts receivable, inventory, accounts payable, borrowings and debt.
The few businesses that do make it through their first few years really understand the importance of the above list, they forecast cash flow and plan ahead.
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Cash flow is the lifeblood of a business – it keeps the businesses heart pumping. Without cash, profits are nothing. Here are the 5 keys areas that affect cash flow which you need to understand