Business is like drifting down a river. You need to monitor the currents if you want to live. Cash flow – in and out of your company – is one of them. And then there is GST (Goods and Services Tax) added into the mix, its impact on cash flow being something to be cautious of. StartupFlora, your business partners in making startup and small business a reality, are here to bring you up to speed on how GST impacts your finances and how you can get in control. We help young businesses get a handle, and an understanding of drivers like GST and cash flow is part of the bigger picture.
So What is Cash Flow, Then?
Cash flow is just money traveling. It is a battle between having more money come in (inflows) and money leaving (outflows). When there is positive cash flow, more money is coming in than leaving – always good for any company. With negative cash flow, it does the opposite, and that might not be good.
How GST Affects Cash Flow
GST affects your cash flow in so many different ways:
Input Tax Credit (ITC): GST enables the company to credit against which they need to pay the GST paid on the inputs. Input Tax Credit (ITC) can be utilized to credit your total tax liability. There may, however, be a payment delay for your inputs under GST and taking the ITC. This payment delay would impact your cash flow.
GST Payments: You are paying GST on your sales (expenditures). It is a recurring expenditure which you will be obligated to incur in your cash flow projections.
Inventory Management: GST has completely changed the entire inventory management process of companies altogether. Inventories used to be of humongous size in the past in order to avoid inter-state taxes. Inventory management would be easy now with a single tax at the national level. Its introduction can, however, turn out to be a spoiler of cash flows in the early stage.
Pricing Policies: The pricing policies too have been affected due to the GST. GST has to be factored in when firms are deciding commodity or service prices. Price changes do come into play as far as the quantity sold and hence the cash inflow is concerned.
GST Compliance Expenses: GST compliance expenses involve form filing, documentation, and in some cases the employment of professionals as company members. They are once more a source of cash withdrawal.
GST and Input Tax Credit (ITC): Overview
Input Tax Credit (ITC) is the lifeline of GST regime. It assists you in reducing your GST liability by balancing the GST on your inputs.
How ITC is done: Assume you are a manufacturing industry, you buy raw material and pay GST on it. You also recover GST from your customer while selling your product. You can set off GST paid by you on raw material against GST recovered from your customer.
The Timing Catch: ITC is alright, but GST paid on your inputs lags behind in utilizing the credit. LAGGING behind can cause a cash flow shortage, temporary.
Practical Tips To Manage Cash Flow Under GST
These are some helpful tips how to manage your cash flow under GST properly:
Accurate Record Keeping: Maintain accurate records of all your purchases and sales. This is for timely claim of ITC and filing of GST return.
Timely Billing: Prepare the GST invoices beforehand. This facilitates receiving payments from customers in time.
Successful Inventory Control: Maintain optimal inventory levels to avoid locking up excessive cash in inventory.
Cash Flow Planning: Prepare cash flow projections at intervals in order to decide an approximate sum of likely cash flow shortfalls.
Negotiate Terms of Payments: Negotiate with the suppliers and the customers for payment terms appropriate enough.
Overdraft Facilities: Where short-term liquidity will tend to fall short of needs, negotiate short-term financing in the form of an overdraft facility.
Professional Guidance: Hire an accountant or a tax agent to obtain professional advice regarding GST compliances and management of cash flows.
GST and Your Business: At a Glance
GST revolutionized the means of business into a completely different direction. The first thing you need to realize is how it will influence your cash flow because it will lead you to riches in the aspect of money. To be master of the cash flow will be the one thing that will keep you navigate during the period of GST and make your company prosper.
StartupFlora: Your Financial Well-Being Companion
We understand in StartupFlora that accounting matters have a propensity to create a mess, and they are towards complicating it, mostly for small business units.
We can introduce you to seasoned accounting professionals who will help you navigate through the GST compliances as well as even the cash flows.
We can walk you through start to finish! Get us on call today and view more.
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