Managing Cash Flow – the six key dates to focus on over the next 12 months

For many businesses, the actual lockdown itself is not the worst period for cash flow, that will come once you are back in business and the build-up of the working capital commitment in stock and, particularly, trade debtors will absorb a lot of cash but the reserves and facilities you had formerly used for this have been depleted during the lockdown period.

Assuming business begins to get back to normal sometime in June or July, the peak effect of the working capital rebuild is probably going to hit you in September. The end of month payroll and supplier payment runs in the final week of that month will be the time of most pressure.

My counsel is that the last week of September is a key date that businesses should start planning for now.

Other key dates we should also be working on

There are other critical dates over the next year or so that are potentially worrying and which you need to plan for. I would recommend you highlight them in your calendars now and start thinking about how you might navigate through a series of ‘pinch points’ from a cash flow perspective.

Most UK companies are December or March year-ends. For December year-ends, 1 October is the due date for your Corporation Tax payment. If you are a March year-end, it’s 1 January.

The COVID-19 crisis hadn’t kicked in back in December and was just taking hold in March, so profits were probably higher then and the tax bill most likely larger. Since then, the lockdown may have depleted the cash generated in your last financial year and it may no longer be there to pay the tax.

For December year-ends, who have just gone through the September working capital peak, cash could be particularly tight.

Currently, this is three or six months away, so there is time to plan and manage cash if you can. If it isn’t possible (to pay your tax bill) from cash flow, then you may be able to agree a Time To Pay arrangement with HMRC to spread it over a number of months.

For businesses with a March/June/September/December VAT stagger, which is the most common, 7 November is the due date for the VAT on the September quarter.

The September quarter is likely to be the first quarter with a significant liability from returning to normal trading. Bearing in mind that this payment is going to be following hot on the heels of the September working capital peak and potentially the October Corporation Tax payment, the VAT payment will need to be planned for.

Whilst it may be possible to spread the payment with a Time To Pay arrangement with HMRC, or short-term borrowing, these tactics are potentially dangerous to enter into. The reason I say this is if there’s one thing that I’ve seen push businesses into insolvency more than any other, it’s getting behind on their VAT. This is because paying off last quarter’s VAT using this quarter’s cashflow is using up the cash needed when the VAT on those sales comes due.

So, you should plan ahead, and if necessary, transfer the VAT element of your customer receipts into a separate account so it’s there when you need it.

The end of January is of course the payment date for your income tax. This is a personal liability, not a company one, but for many owner-managers, their income all comes from the business so there is usually a knock-on effect.

Since the government made it possible to defer the 31 July 2020 payment on account, the amount that will be due on 31 January 2021 will potentially be that much higher. Of course, in an ideal world, we would all put our 31 July 2020 payment on account into a separate bank account so we have it ready. That may not have been possible if you, as an owner-manager, have reduced your drawings from the company to protect its cash flow and have been living off your savings.

If as a result, you need to draw money from the company to pay the tax, then that is a further drain on cash flow. Alternatively, you may be able to agree a Time To Pay arrangement with HMRC, but that is spreading not reducing, so will still need the money to be drawn over time.

The January 2021 payment will be based on your income to 5 April 2020, which was pre-crisis and may well be higher than your income for the tax year 5 April 2021. It may therefore be possible to reduce the payment on account that needs to be made on 31 January alongside the 2019/20 final payment. Talk to your accountant about this.

Ideally, get your tax return done as soon as possible so that you know what the amount is. Although many people leave it until close to the deadline, it’s actually possible to do your return any time after 5 April!

One of the first things the Chancellor announced was the deferral of the VAT payment falling due during the lockdown period. That is deferral not cancellation and it comes due for payment on 31 March 2021.

Given the various drains on your cash flow that will have already impacted, this has the potential to be one of the most critical dates in the COVID-19 crisis and I fear that there’s a risk that more businesses could potentially be pushed over the edge into insolvency at that date than during the actual lockdown. This statement may seem a little negative but it’s essential to confront the realities of the situation now and as it’s more than nine months away, you have time to plan, put money aside or arrange facilities to fund it. The worst thing you can do, as a business owner, is to put your head in the sand and ignore this potential issue that’s coming towards you.

Traditionally in the UK, quarterly rent is payable on 25 March, 24 June, 29 September and 25 December.

If your business pays rent quarterly, then three of these quarter days closely coincide with the key dates we have identified at the end of September 2020, December 2020 and March 2021.

If your forecasts indicate that these dates could be a problem for your business, now might be the time to start negotiating with your landlord to switch to monthly rentals to smooth the cash flow effect.

Finally, the CBILS (Coronavirus Business Interruption Loan Scheme) and BBLS (Bounce Back Loan Scheme) started to be advanced in April and May 2020, mostly with twelve-month repayment holidays.

Those twelve-month anniversaries are going to come around in April and May next year and repayments are going to start, probably on the 1st of May.

The CBILS loans were assessed for affordability, often assuming a return to 2019 trading levels by the time the loan payments commence. BBLS loans were issued with no checks on affordability at all.

If, as seems likely, the economy has contracted significantly, 2019 sales levels might not be coming through. Combined with the aforementioned drains on cash, which are cumulative, many businesses could find themselves in a position that the loan payments are not manageable.

We also need to consider the wider picture, not just the business in isolation, because there is the potential for a domino-effect. If the crystallisation of the VAT deferral at the end of March 2021 precipitates the collapse of your business’ customers, the resulting bad debt losses could eliminate the cash that you had available to repay the CBILS/BBLS loan.

Consequently, I fear there may be a second wave of business failures over the course of summer 2021 when the loan repayments commence.

Certain elements of this article may be quite harrowing for some business owners, but it’s not meant to be alarmist in any way. In the book, Good to Great, Jim Collins talks about The Stockdale Paradox which, in a nutshell says you must maintain unwavering faith that you can, and will, prevail in the end regardless of the difficulties, and at the same time have the discipline to confront the brutal facts of your current reality… whatever that might be.

Sound advice and the key to business resilience will be to address these challenges head on and it all starts with planning.