Cash flow is the oxygen of a business, without good cash flow a business suffocates. With GST payable every three months for most businesses and Income Tax payable every year it can be easy to lose track and fall into a cash flow hole.
Here we explain some methods that can be used in order to be prepared for the dreaded BAS and Income Tax returns.
1. Set aside for GST
GST comes up fairly quickly and many business owners are left scrambling to pay the bill. The first thing to remember is GST isn’t your money, it’s the governments, so therefore it should never be used for funding the businesses expenses.
Therefore if it isn’t yours then the smart thing to do is to put it aside into a separate GST account. The amount to put aside will vary depending on your industry and margins. The best thing to do is to look at your two most recent BAS’, assuming there have been no out of the ordinary expenses for the period, and workout the percentage of your sales that goes to paying the GST difference.
For example if you had $110,000 in sales of which $10,000 is GST and you paid $55,000 in purchases of which $5,000 is GST, then your net GST Payment would equal $5,000.
$5,000 (GST Payment) divided by $110,000 (total gross sales) equals 4.54%. This means going forward you would want to be putting aside at least 4.5% of your gross sales for GST.
2. Set aside for Income Tax
Income Tax is unavoidable (if you make a profit) and payable by both Individual and corporate entities. Regardless if a business is setup as a Company or a Trust, you as the business owner will still need to pay some form of tax on the profits.
Therefore depending on the tax rate you are in you should elect to put some money aside either every week or month for this purpose. The amount of tax to put aside will vary depending on the business structure as well as the amount of estimated profits to be made for the year. The key here is not to put too little or too much aside as both can lead to future cash flow problems.
So it is key to have your accountant do some tax planning throughout the year to give you an idea of the tax you will be paying come 30 June.
3. PAYG Witholding
If you have employees and pay them wages above $18,200 annually, then it is an absolute must that PAYG is also withheld with each and every pay run completed whether weekly, fortnightly or monthly.
This one goes without saying, however many times it becomes easy for business owners to fall into the trap of not withholding the right amounts.
Cash flow is paramount to the success of any business and that is why you need to be on top of your tax obligations.
Too often we neglect this aspect of managing a business and find ourselves unprepared for the end of year results.
But if we take the right steps before hand we can make sure that everything is taken care of in advance.