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Anglo-Spanish Chartered Accountants

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Archive for November, 2010

Robbing Peter to pay Paul

One of the key challenges in every entrepreneur’s life is managing cash flow effectively. If you have a basic understanding of your balance sheet you will know that in addition to your bank balance you will have both rights (debtors) and obligations (creditors) therefore acknowledging these elements will ensure you don’t just spend all the funds in your bank account with total disregard of future obligations.

During the course of your transactions you are effectively acting as a tax collector for the tax authorities in two ways. Firstly you collect VAT by adding it to your sales and secondly you collect income or corporation tax by withholding tax on some of your expenses such as rent or salaries. Consequently, at the end of each period you may have collected considerable funds on the government’s behalf which will need to be paid over in a timely manner. You can read more about the tax collection system in Spain on our website.

The most effective way to ensure you don’t accidentally spend resources that have been collected in this way is to have a separate bank account where you regularly set funds aside to allow you to meet your payments when due.

You may go about deciding how much to set aside in a number of ways:

“The balance sheet method”: Each month take a look at this financial statement and calculate how much you should set aside. You should take into account all current tax creditor accounts minus your savings account balance to calculate how much your piggy bank needs to be stocked up by.

If you don’t have access you an up to date and reliable balance sheet you may prefer to use the “Rule of thumb method”: Each month set aside between 15 and 20% of sales; adjust your percentage each quarter to compensate for slight under or over provisions.

People often complain that they don’t always get enough notice from their accountant with regards to the quarterly tax payments; don’t make excuses. As a business manager you should not just rely on your external accountant to warn you about payments coming up, you should be aware of the tax collection implications of your transactions and take control of the situation by setting aside whatever is needed as you go along.

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