Putting money aside for Revenue etc

larko

Hi

My business has just come through it's first year and so far so good. Growing at a nice pace.

I was thinking about setting aside money every month into another account for the tax bills/rates etc. I mentioned it to the bank and they mentioned Promptpay. It looks like a loan which you pay off over 11 months. It was only mentioned in passing but I'm just wondering can anyone give advice if doing the above is the norm or should I just keep going as I am. So far I am paying all the bills without any hassle but it's the big bills that I am thinking of.

Thanks

IITYWYBMAD

larko wrote: »

Hi

My business has just come through it's first year and so far so good. Growing at a nice pace.

I was thinking about setting aside money every month into another account for the tax bills/rates etc. I mentioned it to the bank and they mentioned Promptpay. It looks like a loan which you pay off over 11 months. It was only mentioned in passing but I'm just wondering can anyone give advice if doing the above is the norm or should I just keep going as I am. So far I am paying all the bills without any hassle but it's the big bills that I am thinking of.

Thanks

Assuming your cash-flow is good, I would urge you to settle P30 and Vat at your earliest convenience. Typically, in a small business, revenue are the biggest creditor on the books. I would not be borrowing. Promptpay is a service provided by AIB (not sure if BOI provide it) which basically pays your P30 and VAT at the end of the year, and allows you to pay them back over 11 months. Again, if you can manage your cash-flow, don't pay for this service.

If you have an accountant, he can quickly set up monthly DD for Rev. If you don't, pay for one for a couple of days, and they can do this.

antoinolachtnai

It's not a matter of a norm. It's a matter of finding the right finance for your business. Finance is another word for capital. Most businesses need capital to grow. Maybe yours does not at this stage and that is fine too. But when you take on new staff or premises at some point, that will put pressure on your cash.

A loan to pay a tax bill is just another type of finance.

What is important is to understand your cash flows and your profitability and the relationship between them.

Positive cash does not mean you are profitable. Negative cash does not mean you are loss-making. But it is important to understand your position.

In general I would advise against setting aside money into a different account for tax. The reason is that opening up lots of accounts for your prospective liabilities is just not a good way to manage cashflow.

The reason I don't like the idea is that anything which creates the idea that 'money in bank = I can make a drawing' is generally a bad idea. You need to manage your drawings taking into account many things, not just tax.

Here is a better way to plan for future tax expenditures. I would suggest you do a one-year cash flow, showing all your payments for the next year, based on last year's cash flow and growth forecasts and taking into account any new costs you expect to incur. Do the cashflow on a daily basis for the next 90 days and on a weekly basis for a further 39 weeks. This will give you a fair idea whether you will be able to make your tax payments on time and whether you need to think about borrowing or other finance.

It will also give you a clear target for how much money you have to have in the current account on certain days to pay your tax and other major bills.

Mulberry

I set aside a percentage (usually 35%) of every invoice received into a savings account for income tax. I also transfer out the VAT to the same account as soon as I receive it. I make a small note of the amounts and dates on Excel. The accounts are set up online so I can easily transfer the funds.

This may not be the best way to do it, but as a non accountant with limited time it solves this issue for me. I have peace of mind because I will be able to pay my tax bill, and that I'm not taking drawings that I don't actually own.

Once or twice I've been caught out where my turnover has grown year on year, so my tax bill is bigger than I'd allowed for. In these cases I've been able to come up with the excess because there's usually a few extra quid floating in the savings account. Maybe increase the percentage if you're worried about this. You should be able to work it out quickly enough, based on your current year's figures.

Otherwise, if you're talented in accounting you can do something more sophisticated, or if you're making enough money then certainly pay an accountant to do it, and probably do it more efficiently.