Many businesses have their turnovers increasing at a very rapid pace along with growing profitability, yes, they are definitely on the right track but they need to remain vigilant throughout. As even such growing and profitable companies experience cash crunch as their working capital is being mismanaged. If the working Capital is utilized and managed in an optimal manner then, it shall help your business improve the Operational Efficiency. Liquidity has a very vital role to decide about the business’s ability to pay off short-term expenses or debts. Now a days businesses are only focusing on escalating their sales, without even bothering about the collection from their debtors, and yes, here lies the problem. They fall into the lending trap to their customers and unfortunately end up blocking their own funds which may be used up for investing in growth opportunities of their business, buying new products or inventories, making capital investments etc.
When your business needs to rely on borrowings in order to meet its obligation and short- term debts just because the recovery from their Debtors is not on time, then it may end up in trouble. Hence, it is very important that the collections are made timely so that the credit worthiness, operational efficiency, capital investments and financial stability remain in order and place.
IMPACT OF LATE RECOVERIES IN DIRECT AND INDIRECT TAXATION
Direct Taxes (Income Tax):
Immediately at the point you make sales, it gets added to the Turnover and you need to pay Income Tax on the profit out of this transaction, as the Income Tax department is least concerned about whether you have recovered the amount from your debtor or not, as the Income Tax is on the NET PROFIT and NOT on the CASH PROFIT.
Indirect Taxes (GST):
Under the GST Regime, the liability to pay the GST arises as soon as the invoicing is done. Therefore, the point of taxation arises on the earliest of the date of Invoice or payment, so in this case you need to pay the GST liability even though the amount is not received from your debtor. Thus, this gives rise to the following sorts of losses-
a) The amount which you ought to receive upon the sales made remains unrealized and
b) The GST liability is paid out of your own pocket as you have not recovered the same from your customer
So, following are the strategies that may help your enterprise to improve the cash flow to free up your cash and ensure that the working capital is in place:
ENHANCE COLLECTION EFFICIENCY
While every business takes pleasure in generating income, not all of them have a proactive approach to make sure that their collections out of the sales made are on time. Therefore, sending timely reminders to the customers has a very vital role to play in. Imparting training to your staff can also help them in dealing properly with the late paying customers.
CASH DISCOUNT POLICY FOR PROMPT PAYMENTS
Offering cash discounts can not only help your business grow its sales but also will it save you from the odds of getting paid at the earliest. You need not wait for a longer duration to get paid. Early payments due to offered discounts ensures better cash flow in your business. The businesses should therefore make sure that the Discount polices offered benefit their business and are implemented accurately.
Stock taking must be done at regular intervals. This will help you to decide which stock items are fast moving and which are slow moving. Hence, this will assure you that not much of your cash or capital is tied up into those stocks which hurt your Cash Flow.
Many businesses struggle with their billing systems as they fail to generate invoices on a timely manner. Remember, immediate sending of invoices can help realizing the receivables more quickly. The billing system can be improved by establishing a proper billing process which ensures timely raising of invoices. Automation in this area can be a useful tool which will not only help in reducing the time but also eradicate the problem of human error.
TIMELY REVIEWING OF THE POLICIES & PERFORMANCE
Regularly updating the operational processes, timely revision of the policies is crucial. Because outstanding debts can make it difficult for companies to stay afloat. Therefore, decision making analysis, reviewing the policies and implementation is vital as it gives the management a broader view of Debtor profiles and collection processes. With this knowledge the management can take appropriate actions in a timely manner to prevent any losses.
Also Read Everything You Need to Know About High Value Transactions Under Income Tax Act
Thus, effective debt collection is very essential for running the business successfully. However, not all the businesses take this on priority basis. Efficient working capital management helps keep your company running smoothly and includes managing your inventory, accounts receivable and payable. Also, you need to maintain both your short-term assets and liabilities to make sure you have the necessary cash you need to run your day-to-day business.