Cash is king as the saying goes. By understanding your cashflow, if something changes in your business you can quickly assess the impact on your cash. Speaking to the bank manager in advance is a much easier conversation to have, rather than trying to deal as it happens, whatever the reason might be.
Making Tax Digital for VAT means that many more businesses now have up-to-date digital information which can help make cash management less challenging. MTD is an opportunity to take control of your financial information and use it to your advantage.
Businesses usually get into difficulties because of a lack of cash rather than a lack of profit.
Causes of this can include:
Overtrading. You are profitable and your business is growing and you need to spend more money buying new equipment, increasing stock levels and perhaps increasing your workforce. The costs usually come before the profit on increased sales is realised which can lead to cash shortages and in acute cases, failure of the business.
Increased stock numbers and values. A business with an extra 100 sheep at the end of the year will have purchased them or spent money rearing them. This does not affect the accounting profit, but will impact on your cashflow.
Machinery and buildings. Capital expenditure is depreciated and written off against profit over several years. Ideally repayments on finance to fund expenditure should be matched to the period over which the asset will produce income.
Private drawings from a partnership are not deducted from the profit and loss account. If your drawings regularly exceed the profits being made, your cashflow will be squeezed.
A business not generating sufficient cash to cover loan repayments, drawings, and increased working capital will experience cashflow problems. It is tempting to try to repay a bank loan over as short a period as possible, but you have to be realistic.
Fluctuating tax bills are another factor that can impact upon cashflow. Depending on the level of capital expenditure, taxable profit can be totally different to accounting profit:
A new tractor purchased in one year could mean that there is no tax to pay thanks to Annual Investment Allowances.
The following year, if there is less capital expenditure, tax bills can be significantly higher and any HP repayments are still being made.
Company tax bills are a single payment nine months after the end of the accounting period. Furthermore, a company pays tax at a single rate so tends to fluctuate less than for an individual.
An individual’s tax bill consists of two payments on account followed by a balancing payment. An increased taxable profit can also push an individual into a higher rate of tax. Payments on account can be adjusted so it’s important to plan ahead and be aware of the issues.
For more information and advice on cashflow for your farming business, please get in touch with Rodger by calling 01539 942030 or email rodger.hill@armstrongwatson.co.uk
