Chancellor adds to the pressure on company cash-flow

26 January 2018

New tax payment deadlines hit cash hard

In the latest autumn budget, the Chancellor changed the schedule for corporation tax payments for businesses generating over £20m in profit. From April 2019, these companies must make quarterly tax payments four months earlier than usual. For the average FTSE 100 company this means a £21m deterioration in daily cash balance. Depending on cash flow funding, this will cost between £1m and £2m* every year. For non-FTSE 100 companies that are still subject to the new rules, this will reduce average daily cash balances by £330k for every £1m of corporation tax paid, costing £16k to £33k* each year.

This is in addition to capping of loan interest relief and the reduction in the amount of brought forward losses available which were recently introduced.  So even loss-making business will end up paying tax  - and sooner than expected.

These changes will restrict cash flow and for businesses with highly seasonal cash flows - this could prove problematic.

 

Protect your cash-flow

Our recent Global Working Capital study shows pressure in the system, which is set to increase. Your first reaction may be to look for additional funding.  What if you could offset the change in tax payment deadlines without borrowing more money, just by looking at your working capital?

Seven tips to address your working capital:

  1. Eliminate billing delays. Customers often start their payment clock from receipt of an invoice, so it’s vital that you bill quickly. How long does it take between your company dispatching goods to billing?  Sending invoices through the post? You’ve added an extra delay of one to two days. But consider the delays in actually generating an invoice. For service businesses, billing delays can often be even higher.
  2. Address overdue debt. Do you hold more more than 10% of AR in overdue debt? You must re-enforce payment compliance, proactively manage high risk debtors and ensure robust, efficient processes for dealing with invoice disputes. As a rule, one credit note for every 25 invoices is excessive.
  3. Eliminate early payments to suppliers. Do you make payments before you have to? Whilst we don’t advocate making payments late, paying early is simply giving cash away.
  4. Buy on more favourable terms. When did you last review your terms with suppliers?   Help them to help you and talk about payment terms, minimum orders and consignment stock.
  5. Reduce the level of early settlement discounts taken. Whilst this will have an impact on cost there is clearly a need to balance the need for cash versus the need for margin.
  6. Apply variable lead times for different classes of product. Faster-moving lines should be available with shorter lead times, but slower movers can be subject to much longer lead times to reduce the level of inventory required.
  7. Improve the visibility of inventory throughout the supply chain to ensure that it’s factored into inventory and production planning. Often, purchased materials aren’t taken into stock until they arrive at a warehouse, similarly returned products aren’t returned quickly enough.

 

Summary

Clearly, there’s much more that you can do to improve your working capital and protect your cash flow. Here we’ve highlighted seven tips to get you thinking.  If you’re looking for sustainable change, you need a comprehensive review of the four key levers in working capital.

In our experience, businesses can often improve working capital by 20% - 30% by focussing on these four4 levers with a cash lens.

Get in touch to find out how we’ve delivered over £3bn in working capital improvements for businesses just like yours.

Note*: Assumes weighted average cost of capital (WACC) of 5-10% pa.

 

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Niall Cooter | Working Capital specialist
Profile | Email | +44 (0)7714 069861

More articles by Niall Cooter

Stephen Tebbett | Partner, Working Capital
 Profile | Email |  +44 (0)20 7213 5511

More articles by Stephen Tebbett

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