Accounting
November/December 2000
Testing Times
For Cash
Flow
By Geoff Coy, Certified Practising Accountant
In this article Accountant, Geoff Coy looks at the
impact the GST and recent fuel price rises are having on small
business cash flow.
In recent months, there have been several factors
which have severely tested the management skills of the most astute
service station dealer.
Initially there was the introduction of the Goods
and Services Tax (GST) and the resulting scrapping of the wholesale
sales tax and fuel excise tax.
The introduction of the GST has added an enormous
burden to small business operators as they struggle to cope with
and absorb the new tax system.
Then, following the introduction of the GST, the
wholesale price of fuel increased from approximately 90 cents
per litre to $1.00. This represents almost a 10% increase over
the space of a few months.
For the ill-prepared business owner, such an increase
could cause havoc with cash flow and might ultimately force some
dealers out of business altogether.
Before GST
As prices increased by 10% so too has the amount of underground
fuel stocks and accounts receivable.
Take for example Con's Convenience Store. Con's
business can carry anything up to 100,000 litres of fuel and $40,000
worth of outstanding credit cards, eftpos and previous days takings.
A recent snap shot of Con's business reveals
the following:
| |
| |
$ |
$ |
$ |
|
90,000 |
100,000 |
10,000 |
|
40,000 |
44,000 |
4,000 |
|
130,000 |
144,000 |
14,000 |
Con's current overdraft limit is set at $50,000.
But with the continued increase in fuel prices, Con was half expecting
to see his overdraft jump to over $60,000. Instead he was surprised
to see it peak at just over $50,000.
The saving factor for Con was a fuel excise credit
of $6,000 which he promptly banked in early July and the excess
of GST collected in the first quarter over that paid out.
Fuel Excise rebate
By the time you read this article, Con will have lodged his first
quarterly Business Activity Statement (BAS) which was due and
payable on 11th November 2000.
A summary of Con's BAS showed the following:
| Net GST payable |
$10,000 |
| Wholesales Sales Tax credit |
($6,000) |
PAYG witholding Tax
(previously PAYE) |
$6,000 |
PAYG instalments
(previously company tax instalments) |
$5,000 |
But will he have adequate funds with which to pay
the cheque?
This time the answer is yes because:
1. The fuel
excise rebate helped Con withstand the effect of a cash flow blow-out
from increased fuel prices.
2. Quarterly
payers have the use of GST collected from customers for up to
92 days of July, August
and September plus 31 days in October and 11 days
of November due to the 3,2,1 transitional arrangements.
The transitional rules will be phased out by the
third quarterly GST reporting period and Con will find himself
having to pay the 4th quarters GST and PAYG, 21 days after the
end of that quarter.
Added to that, Con will not have the comfort of
relying on another fuel excise credit or wholesale sales tax credit
to support his cash flow.
Contingency arrangements
for GST commitment
Once the transitional arrangements cease, the best option available
to Con is to quickly ascertain what his monthly GST commitment
will be and to have a similar amount representing the difference
between the GST collected and paid transferred into a second bank
account.
It may also be advisable for Con to transfer a similar
amount into the same account for his PAYG withholding instalments
arising from deductions made from payments to employees.
Without utilising an accounting package the simplest
way to calculate the approximate amount of GST to be transferred
to a second bank account and would be to use the following rule
of thumb.
Calculate the GST from your business gross profit
and then deduct any GST paid on business overheads and capital
acquisitions
eg
| Assuming monthly sales of
$400,000 and a gross margin of 12% Gross Profit |
= $48,000
|
| Estimated GST on above @10%
|
$4,800 |
| Business Overheads |
$40,000 |
Less any items free of GST
ie wages, super, bank fees say |
$15,000
|
| Overheads with GST |
$25,000 |
| Estimated GST
on above @ 10% |
$2,500
|
| Estimated allowance for
GST |
$2,300 |
| Plus PAYG withholding instalments |
$4,000 |
| Transfer to 2nd bank account |
______
$6,300 |
Cash or
Accrual
When calculating the necessary provision for GST, consideration
should also be given to the basis of Con's GST registration i.e.
whether it is cash or accrual accounting.
The cash basis would only require a provision to
be made when payment is made as compared to the accrual basis
when the transaction is incurred.
Unfortunately, if you have selected the wrong method
of accounting for GST you must wait 12 months before applying
to change methods.
The above calculation method is intended solely
as a guide in determining cash flow and budgeting requirements.
It should not be used to calculate the actual GST liability.