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The Dr Is In : Show Me the Money!

How to steer clear of the April Cash Flow Nightmare

February 2012 By Leslie Shiner

I hate April. I used to like April—my birthday is in April. But now, I just hate it. Not because as one gets older, the birthdays seem to come more often, but April is a cash-flow nightmare. Does your company suffer from the April Cash Flow Nightmare? What causes this?

Timing Is Everything

If you are a corporation or a subchapter S company on a calendar year, then your tax return is due on March 15. If you are a partnership, sole proprietor or LLC, your tax return is due April 15. Of course you can file extensions, but if you owe any taxes, you need to pay those taxes by the original filing date. Therefore, even if you file an extension, you need to do a preliminary return to see if you'll owe any taxes.

Then, along with paying any taxes for 2011, you may also need to make pre-payments for your 2012 taxes. And if you live in a state like California, your property tax payments are also due on April 10. Whew. Doesn't it just make you hate April?

Digging Out of a Hole

Too many ESC's will find themselves in a cash-flow crunch when it comes to tax time. This is especially true if you have had losses in the past and are now starting to make a profit. If your 2011 year was breakeven or even profitable, you may have a tax bill but no cash in the bank. This is because many companies are digging out of a large cash hole that was created by losses in prior years.

The problem comes when companies borrow money to cover operating losses. Let's say that you lost money back in 2009 or 2010 and you borrowed from your credit line. Another way you may have stayed afloat was to slow down your payments to your vendors and supplies, causing your accounts payable build.

As you start making a profit, that money gets funneled back into paying off these debts. So while you may feel like you are back on track profit-wise, your cash is still suffering.

When you borrow money, you don't have to pay taxes on that money: it's not income. Then, when you are profitable, you have to pay back that borrowed money. Those payments come out of your checking account, just like payroll and other expenses, but those payments are not considered an expense and therefore do not affect your profit.

 

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