Why spread your VAT payment?
More and more businesses have begun to realise the value of protecting cash-reserves and managing cash-flow in order to grow their business successfully. Recent world events have only highlighted this further. As incomes have been hit, we realise the value of holding cash in the business. One method of cash-protection to aid growth which is proven to support cash-flow is VAT funding.
This facility allows businesses to turn a quarterly payment in advance, into a monthly payment in arrears. Here are 5 quick reasons why you should consider spreading your businesses forthcoming VAT payment:
Manage the peaks and troughs of cash-flow:-
Very few businesses invoice quarterly. Most income is derived monthly or by contract. A quarterly ‘chunk’ payment is contrary to how most businesses’ cash-flow operates. For instance, you will pay salaries each month, not each quarter! This is inconvenient and burdensome. VAT funding means the lender will pay the quarter’s payment on your behalf. The business makes 3 equal payments beginning the following month.
Cyclical Nature of VAT payments:
VAT is calculated based on historical trading performance. It is possible and even likely that bigger VAT payment would be generated at times when business cash-flow is lessened. For example a Pub/Hotel could have a busy Christmas period – this would trigger an abnormally large VAT bill around February – which would be the quietest time of the year. Taking a chunk out of cash-flow whilst income is at its lowest is bad cash-management. Keeping cash-flow management balanced throughout the peaks and troughs is imperative.
Allows you to focus on growing the business:
Large VAT payments out of cash-flow often mean sacrifice elsewhere. This might mean that you have to spend valuable time chasing debtors in order to raise cash. Or it might mean holding off on a potentially lucrative contract, or hiring that new member of staff that would help grow the business. Either way when you juggle cash to make VAT payments usually there is a sacrifice. This can easily be avoided by having a guaranteed funding option in place.
Rainy day fund:
Covid-19 has been a harsh lesson for many businesses. Sometimes things happen in business which are out-with our control. If we do not plan ahead sufficiently it can be damaging. It is important to protect cash-reserves during the good times to ensure you are best placed during the bad times.
Revolving Credit line:
When VAT funding is put in place, typically the facility is arranged on a ‘rolling’ basis. This means that you can plan ahead safely in the knowledge that each quarter’s payment is already covered, providing you have made all previous months’ payments on time.