When Taxes and Cash Flow Collide

When Taxes and Cash Flow Collide

One of the best ways to increase cash flow is to not set aside any money for your tax payments. And one of the best ways to not have cash flow is to miss your tax deadlines and get slapped with back taxes and penalties.

Taxes and cash flow collide for the same reason that short-term and long-term gratification are often at odds. To get what we want, sometimes we have to take steps that seem painful and counterintuitive in the short-term. I’m going to recommend a few such steps that will help you to pay your taxes on time and minimize unnecessary fines, all with minimal impact on your cash flow.

1. For Every Sale You Make, Immediately Put Aside the Tax Money You Owe On It

Preferably, put it in a separate bank account far from sight and temptation. While this may seem obvious, this is the mistake that small businesses make most often. Having faith that cash will appear in time for tax filings, such as monthly sales tax returns, small businesses spend all their revenue on expenses and growth.

Some people use similar logic in the middle of nowhere on a cross-country road trip. Their thinking goes, “We have an eighth tank of gas, and here’s a gas station. Let’s just keep driving. We’ll save time and another gas station will appear when we really need it.” Some of those people run of out of gas.

2. Don't Let Customer "Pay the Tax Part Later" on High-Value Goods

It doesn’t matter whether it’s your first sale or 1,000th, a first-time customer or an old-timer, the request is a red flag. If they can’t pay today, why will they be able to pay later?

Though you may feel tempted to please customers, if they stiff you or go belly up, you’re on the hook for the taxes they shirked. The government does not care that you did not collect. Do not put yourself at risk of tax penalties just to win a sale.

3. How You Book Revenue Can Affect Your Cash Flow and Ability to Make Tax Payments

Most companies operate on an accrual basis, meaning they book revenue at the time of invoicing, not when the actual cash arrives. When companies book revenue this way, they are still immediately liable for those sales and the connected taxes.

Unfortunately, there is a disconnect with taxes, which operate on a cash basis. You are liable to make the tax payment as you book the revenue, even if you haven’t received the cash payment.

Let’s say you generate a $1 million invoice on March 25 and owe the state revenue department $100,000 on it. Because that revenue was booked in March, you must pay taxes on it in April. However, you give customers 90 days to submit their payments. You won’t see the $1 million until June. Therefore, unless you have $100,000 set aside, you can’t make the payment and will accrue penalties.

Instead of punishing yourself for big sales, adjust how you book revenue. If you sell a low volume of high-priced goods, book revenue when you ship the product instead of booking at the time of invoicing. You’d still book revenue on an accrual basis, but you’d do so in a way that enables you to collect payment before you owe taxes on that revenue.

You could peg your revenue booking date to other events. At a B2B software business, for instance, you could recognize revenue on the date that a software implementation is completed. As long as you’re consistent, the exact timing doesn’t matter (within reason).

These tips can save your tax payments from cannibalizing cash flow, and vice versa. To plan and budget effectively, you have to manage that potential conflict. If you can stomach 12 paragraphs on taxes and cash flow, I think you have the discipline to handle this situation.

Jonathan Barsade is founder and CEO of Exactor, Inc., a leading developer of end-to-end solutions for secure sales tax record keeping and compliance.