You are a business owner who makes quarterly VAT payments. You know you’re going to come up short when your next filing is due, so you’re already thinking about getting a loan. Unfortunately, this is not your first time. You have used VAT loans multiple times in the past. You are thinking you would like to break the cycle, but you don’t know how.
VAT loans are not bad in and of themselves. They are exceptionally good tools to help business owners manage cash flow when times are a bit tough. However, they are not intended to be a long-term funding that continually gets recycled quarter after quarter. If you are having to take out loans three and four times every year to pay your taxes, there are systemic problems in your business model that need to be addressed.
Below is an easy-to-follow recipe for avoiding regular VAT loans. Do your business a favour and figure this out. VAT loans are good for emergency purposes, but you cannot sustain a business if you are constantly financing something as basic as VAT.
Change Your Mindset
The first thing you need to do is change your mindset about VAT. Remember that VAT stands for ‘value added tax’. It is a tax your customers pay on the value of products and services they buy from you. Understand that there is more to the VAT name than meets the eye.
Being a tax, it is above and beyond what you are charging for your products or services. You have already worked out your prices to cover your costs and put some profit in your pocket. VAT is extra. If you are not making enough money to keep your business going and still pay VAT, perhaps you need to raise your prices or cut your costs. Whatever you do, don’t look at VAT as a source of income.
Establish a Separate Bank Account
Next, establish a second bank account into which you will deposit VAT funds. The reason for doing so may not be obvious, so let’s unpack it.
All the money in your general bank account represents cash to keep operations going. When a bill is due, you check that account to make sure you have enough money to cover it. Then you pay it. That’s fine. The problem is that VAT money is not your money. You do not collect it to fund your regular expenses.
You are simply a collector and holder of VAT on behalf of the government. The money you collect is separate from your general revenue and should be treated as such. That is why it helps to have a separate bank account. Keeping the money separate from your general business receipts makes it a lot easier for you to not spend that money.
Deposit VAT Daily
Finally, deposit collected money into the VAT account daily. Don’t do it every couple of days, once a week, or even once a month. Why? Because waiting to deposit the money opens the door to the very problem you are trying to avoid: spending that money rather than setting it aside.
Depositing the VAT that you collect on a daily basis guarantees that you will have the money in the account when your quarterly payment comes due. And if you are worried about the accounting hassles of daily deposits, stop worrying. You have to do the accounting anyway, right? It is not going to involve any extra effort to deposit daily if you are already doing the accounting.
If you’re not doing the accounting, that may be why you find yourself routinely applying for VAT loans. Your lack of accounting doesn’t allow you to truly understand your financial picture from one quarter to the next. When you next VAT return comes along, you do not have the money because you haven’t kept track of it.
A VAT loan can be very helpful for managing cash flow in an emergency. But such loans should never be considered a panacea. If you are having trouble paying VAT every quarter, you have a cash flow problem that needs to be addressed with more sound accounting and better banking practices. The goal is to fix whatever problem is causing the regular need for VAT loans.