Cashflow Trick - Part 1
Many small businesses struggle with cash flow. One small trick I use in my own business and advise other to do is to set up at least two bank accounts.
One for the general operating purposes (usually a chequing account)
2nd account (could be chequing or savings account)
The first account is the main account that is used for everything - receipt of sales and payment of bills.
The second account is one I use to "sweep" cash that is ear-marked for tax remittances or other government compliance payments. In Canada, that can be sales tax (GST and/or PST) or payroll remittances.
Soloprenuers and businesses are required to remit GST when their taxable revenues or supplies are > $30,000 (see link). What that means is that you are collecting the 5% GST on behalf of the government and remitting it to CRA monthly, quarterly, semi-annually or annually. That amount collected is then net off with GST paid on expenses incurred for the business - so the actual GST filing is the net of these two.
Net GST Payable or (Receivable) = [GST collected on sales] LESS [GST paid on expenses]
Net GST Payable or (Receivable) = [GST Collected] LESS [GST Input Tax Credit]
(If the amount is positive, then there is an amount owing to CRA and if the amount is negative, CRA owes the business an amount.)
Setting up the 2nd bank account allows for business owners to set aside the amounts collected for GST to ensure they a) don't spend the GST collected that is technically the governments and b) have enough cash to remit when the time comes.
Essentially, what I do is move the sales tax amount collected when a customer or client pays invoices from the operating account to the 2nd bank account. I don't have to do it the day the sales tax comes in, but typically, I might do it weekly or at least bi-weekly or match it to the frequency of the cheque runs and vendor payments.
The best part is, if the business incurs taxable business expenses, by virtue of the formula above, the 2nd bank account should always have an excess. The remainder left over from paying GST can then be used for other cash-flow purposes - like saving for income taxes at the end of the year. Following this method will definitely take the stress out of worrying about if you have enough cash at the end of the month, quarter or year to pay GST liabilities!
What other cash saving tips do you do in your business? Leave a comment below and share your wisdom!