Yay, I got paid by my client. I can pay my taxes this week! Why is that even a thing?

Rachel White
Aug 24, 2017 · 4 min read

This week I got an email that one of my clients had paid. I’ve now got cash to pay the BAS (Business Activity Statement) to the ATO (Australian Tax Office) due this week. Yay!! At that moment I was very happy (ok, I’m a geek!).

To translate for non Australians, it meant I have the cash to pay taxes. Enough said so far……..

My business is profitable. It pays a decent income. So why is this event even a thing? Let alone a cause for cracking the champagne….

Profit and cash are not the same thing. A lot of people know that conceptually but still get caught out by it. Something’s getting lost in translation.

Many business owners were employees, then became self employed. In your personal affairs, your bank balance is your savings. Income less expenses are savings. Isn’t that the same as profit? It’s easy to see why people get this mixed up.

In business, profit is sales less expenses. It sounds the same. There’s a key difference.

A sale happens when a customer is happy you’ve delivered what you said you’d deliver. This is when you invoice them. Not when they pay you.

An expense happens when you’ve made the commitment to spend the money. Not when you actually pay it.

There’s a timing difference between when the profit occurs and when the money moves. That is why they’re different. For people who run their business by their bank balance (which is most people), it’s what catches people out. All the time.

Examples help. I’ll walk through why I was so excited!

Money coming in

I bill my clients at the end of the month, with payment due 14 days later. Some pay on time, some pay within 30 days.

So the money that came in this week was for July sales. I count it as revenue in July when I’m looking at profit.

Sounds simple so far? The GST adds a twist.

The invoice includes 10% GST (Goods & Services Tax — called VAT in many countries). It’s money I collect on behalf of the tax office on sales then paid to them every 3 months.

For the money that comes in, some of it belongs to the tax office (the GST). I won’t pay that until November, as part of the BAS filed for the 3 months to 30 September 2017 (the September quarter).

Does your head hurt yet? My accounting system is very good at keeping track of all this. It’s been setup to mean I don’t have to keep this straight in my head. My bank statement can’t do that for me.

Money going out

In April, May & June, I take a look at my full year profit forecast. I then pay myself a salary (from my company to my personal account) based on what I expect to make for the year

I also pay a bunch of bills in advance.

This is all perfectly legal and normal. It’s called tax planning.

It has two impacts on my cashflow:

- my bank balance is close to zero at the end of the tax year (30 June in Australia).

- I pay myself a net salary, after tax. That tax (called PAYG) is then paid by my company to the tax office as part of the June quarterly BAS. That’s the big bill due this week.

What this means is I go into July with a very low cash balance. I then have a large bill due at the end of August.

What to do?

During that 8 week period, I need to juggle my cashflow. Given I do that for my clients as a CFO, it is something I’m confident enough to do.

How do I do that?

- do a weekly cashflow forecast from end of June to end of August to make sure I’ll have enough money to pay the BAS

- make sure I pay myself for July and August. That’s not something I skip

- I used to have large insurance bills due in August. This has now moved to October, which takes the pressure off this time of year

- stay on top of customer collections

- it may be I need to use my overdraft that was pre-approved years ago. That works well if my bank balance goes into the red for a few days with a customer who pays me at the end of the month

- failing all else, ask my accountant to setup a payment plan with the tax office for this BAS. This spreads the payment over 6 months. That’s what I did two years ago.

Your accountant may suggest holding the GST and PAYG in a separate bank account. That does work. However, it earns no interest and is “dead” money on your balance sheet. It also means I have a taxable profit in my company, which isn’t helpful.

This is how I deal with a specific situation that always happens every year. It gives me the best tax and commercial outcome.

There are lots of others. I’ve created a course that takes you through all the differences and teaches you how to use my tools. I use these tools for my clients and also myself.

The trick is how to best manage this for your own situation. I’ll keep sharing these sorts of stories. You’re the one who needs to apply the learnings to your own unique situation.

Rachel White

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CFO | Writer | Cat lover | Budding amateur chef