Interest and Penalties – Corporations

The CRA charges compound daily interest on all balances owing. Interest begins to accumulate as of the “balance-due day”. The balance-due day is generally two months after the fiscal year-end of the corporation¹.  For example, a corporation with a December 31st fiscal year end should ensure their corporate income taxes are paid by February 28th.  Even if the final tax liability has not been determined at that time, an estimated payment should be made based on available information.

Instalments – Corporations

New corporations are not required to make instalment payments during their first year of operation. Corporations are also not required to make instalment payments if their income taxes payable in the current or previous year is $3,000 or less. In most other situations, you will be required to make monthly or quarterly instalment payments throughout each tax year.

Corporations can choose from three options to calculate these payments:

1. Current year estimated tax payable
2. Previous year tax payable and
3. A combination of the previous year and second previous year tax payable.

Instalments are required based on the lowest amount calculated under these three options. Generally, most corporations will pay their instalments based on the previous year tax payable unless they anticipate a significant reduction in the current year estimated tax payable.

If you are required to pay tax by instalments but you do not make the payments, interest will be charged at the prescribed interest rate on all unpaid, insufficient or late instalment payments. You will also be assessed a penalty if total instalment interest charges exceed $1,000. The penalty is calculated as:

1. actual instalment interest charges for the year, less
2. the higher of
   1. $1,000 or
   2. 25% of the instalment interest that would be charged if you had not made any instalment payments for the year
3. divide the difference by two.

If instalments are overpaid throughout the year, the amount can be refunded to you when your income tax return is assessed, or it can be transferred to the instalment account of the next tax year.

Example

A Corp. has a December 31st year end and must make monthly instalments of $75,000 starting in January 2022 for an annual total of $900,000. Assuming A Corp. makes no instalments throughout the year, the CRA will assess instalment interest of approximately $40,000 plus an instalment penalty of approximately $15,000.

Furthermore, assuming A Corp. has a balance owing of $1 million for the 2022 tax year and the balance due is paid at the time the corporate tax return is filed on June 30, 2023. Since the balance due was not paid by February 28, 2023, arrears interest will be assessed beginning March 1, 2023 until the balance is paid off on June 30, 2023. This results in approximately $24,000 of arrears interest assuming a 7% rate.

Interest and Penalties – Individuals

Similar to corporations, the CRA charges compound daily interest on all balances owing by individuals. The payment deadline for individual income tax returns is April 30th each year so interest begins to accrue on the balance owing as of May 1st. The balance owing includes unpaid taxes, penalties, and previously accrued interest charges.

Late-filed returns may be subject to a penalty as well. Individual income tax returns are due by April 30th each year or June 15th if you are self-employed. All individuals, including those that are self-employed, must pay their balance owing by April 30th. If a return is filed after April 30th or June 15th, then you will be subject to a late-filing penalty calculated as 5% of the balance owing as of the payment deadline plus 1% for each full month that your return was filed after the filing deadline up to a maximum of 12 months (maximum penalty of 17% of the balance owing). This means that you will not be assessed a late-filing penalty if your return is filed on time, or if you pay your balance owing by April 30th even though your return was late-filed. Repeat offenders are subject to steeper penalties.

Instalments – Individuals

Individuals are required to make instalment payments if your net tax owing will be greater than $3,000 in the current year and in at least one of the previous two years (the threshold is $1,800 in Quebec).

Once it is determined that you are required to pay tax by instalments, you must make quarterly payments no later than March 15, June 15, September 15 and December 15. You can choose from three options to calculate these quarterly payments: the no-calculation option, the prior-year option and the current-year option. The no-calculation option is the default option used by CRA to generate instalment reminders, but the other two methods may be more beneficial to you.

1. Under the “no-calculation option,” your quarterly payments are calculated as 25% of the net tax owing per your most recent assessed tax return. This option is best if your income, deductions and credits are approximately the same each year.
2. Under the “prior-year option,” your quarterly payments are calculated as 25% of the net tax owing in the immediately preceding year. This option is best if your income, deductions and credits are approximately the same as the preceding year but have changed significantly from the second preceding year.
3. Under the “current-year option,” your quarterly payments are calculated as 25% your estimated net tax owing for the current year. This option is best if your income, deductions and credits have significantly changed from prior years.

Similar to corporations, individuals will be charged interest at the prescribed interest rate on all unpaid, insufficient or late instalment payments if you received an instalment reminder from Canada Revenue Agency and were required to pay based on the criteria discussed above. Interest will be calculated based on the option which results in the lowest amount. You will also be assessed a penalty if total interest charges exceed $1,000. The penalty is calculated in the same manner as discussed above for corporations.

E-Commerce Bookkeeping

Bookkeeping, simply put, is the act of recording the money that enters and exits the firm/business. Regarding bookkeeping and accounting, owning an e-commerce firm is similar to operating a traditional retail store. Accounting for an online retail firm entails concentrating on inventory and cash flow while relying on retail accounting software to fill in the gaps.

Bookkeeping is a necessary part of running an e-commerce firm. The company’s items will be available to a wide range of customers at all times. The store can reach a big audience and fulfill drop-ship orders while maintaining a modest physical footprint by using the internet.

While creating a website and a store are essential first steps, the store will fail to acquire momentum without financial preparation. To ensure the success of the e-commerce firm, the following are the bookkeeping areas that must be carefully managed.

Bookkeeping Management Focus Areas 

For business owners, e-commerce bookkeeping may be complicated, but the managers can choose the best solution for the organization after understanding how these difficulties might affect e-commerce bookkeeping.

Managing Alternate Payment Options

While most clients will pay using credit cards, the e-store may choose to accept alternative forms of payment. If this way has opted, the e-commerce platform should be able to track these sales. Checks, cash, and gift cards may be accepted in addition to credit cards. Taking other payment types may make bookkeeping more complex, yet it may make purchasing more straightforward for the clients. Payments made by cheque or cash, for example, will not appear in the records until the funds are deposited. It is crucial to maintain and manage these alternate payment lines.

Managing Fees

The e-business almost certainly has to pay merchant fees if they pick an e-commerce platform to host the online business. Using one of these platforms for the e-commerce firm may provide a variety of advantages, ranging from a speedy launch to easy search optimization. However, the platform will take a percentage of each sale in return for these benefits.

Deposits in the bank account are net sales rather than gross sales, making bookkeeping more difficult. To manage this, the business manager needs to note the gross sale in the e-commerce bookkeeping, then capture the difference between the gross and the net to document the merchant fees.

Tracking Inventory

Another issue with e-commerce bookkeeping is keeping track of inventories across platforms. Many e-commerce platforms include inventory monitoring built-in, making it easier to keep track of and manage the online stock. However, if the store sells the goods on numerous platforms, these sites will not track inventory changes from outside transactions. As a result, having a single location to keep track of inventories is critical. An outsourced bookkeeper may use the information to create an accurate record of sales, restocks, and returns in the store’s books.

Managing Third-Party Payments

The e-commerce store may employ third-party payment processing systems, making bookkeeping more difficult, especially when it comes to exchanges and refunds. Did the third-party e-commerce platform, for example, keep track of product returns? Or did the refund get recorded in the company’s accounting system?

Furthermore, even if a buyer returns an item, reclaiming the merchant charge the company paid is unlikely. As a result, the merchant charge becomes a loss, which must be accounted for in the company’s books.

Bottom Line

An e-commerce business, like any other business, needs proper financial and non-financial management to run smoothly and prosper exponentially. Bookkeeping, if broken down to more straightforward tasks of recording, compiling, segregating, and presenting, can lead to easy and value-adding financial books. These records then add towards better management and future growth of the e-commerce business.

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LET’S TAKE A LOOK!

1. Maintain your books up to date

If you own a business where cash flow is critical, it is essential to have a strong accounting system and maintain it as up-to-date as possible. The good news is that having a solid accounting system is not difficult. We provide a service that will give you updates about your cash flow status. We will take care of the entire procedure for you at a fair fare, lower than the average accounting company.

2. Send out invoices as soon as possible

Keep track of your receivables by sending out invoices on time and clear payment deadlines. Make sure to follow up on outstanding bills as soon as possible to assist keep the income flowing.

It is also important to ensure that the payment instructions on your invoices are easy to read. Include a visible payment due date as well as a detailed list of products and services so your client knows exactly what they are paying for it.

3. Expand payment options and provide discounts

By giving discounts for early payment, you can reward your best clients while also managing your cash flow. This allows you to show your gratitude for the positive relationships you’ve created with regular customers while also encouraging them to pay on time in the future.

4. Inventory management

It is essential for businesses to be able to satisfy consumer needs promptly but having too much inventory on hand comes with a cost. Aside from limiting cash flow, it also generates storage and maintenance expenses, as well as the risk of losing value when new models replace older ones. It is essential to evaluate your inventory on hand on a frequent basis in order to optimize it. We adopt software that will assist you in making the right decisions, and if your inventory is complicated, a scan and track system may be the best option to have your inventory updated in real-time.

5. Use supplier discounts to your benefit

Like you, even the suppliers are typically keen to collect their receivables as quickly as possible. For that purpose, many of them provide discounts for early payment. If you noticed that your business cash flow is poor, you should request your supplier to extend the due date of your invoices, this will give you room to breathe. There may be an additional administrative cost, but it may be worthwhile to ensure that you have enough cash on hand to pay your other responsibilities.

6. Increase your prices

A company owner should review the business rates on a frequent basis to ensure that they are covering their costs and on target to earn a profit. It is typical in the early phases of a business to lack sufficient data to determine appropriate pricing. In reality, many businesses would offer a low price to attract consumers and verify their product early on. Therefore, after a company has gained a certain level of traction, it is possible to raise pricing, which is the most straightforward approach to boost profits.

7. Existing contracts should be reviewed to save money

Cutting costs is probably the most common method for a small business to increase its cash flow and profitability. Any business has a range of costs that add up over time. It is a good idea to keep track of your costs on a regular basis to verify that you are still utilizing them and that they are bringing value to your organization. Several businesses start to utilize a system that helps to negotiate existing contracts, for example, phone or internet expenses.

8. Owner salary reduce or deferred

One of the most straightforward strategies to free up cash flow in the near term is to cut or eliminate your income as a business owner. Please note that owner wages are a fundamental and necessary expense of the business, so it makes sense to pay yourself a salary and then reinvest it into the company to address any cash flow deficits, depending on the tax implications. Hopefully, this is just a temporary solution.

9. Create a credit line

A business line of credit is a simple way to help boost cash flow if you don’t already have one. If your company is registered and you’ve been paying your bills and invoices on time, you could be able to acquire a line of credit for your company that would provide a rapid cash injection. It is important to do some research to figure out which credit line is ideal for you and has the lowest interest rate. What you need to consider are the costs, the monthly payback rate, and a secured or unsecured credit line.

10. Make a monthly (or weekly) budget

Calculating your income and costs, as well as the related cash flow is one of the most important tools for small businesses owners to comprehend how much they can spend and how much they really need. Budgets don’t have to be extremely complicated or even accurate, they’re just projections that help to figure out when cash flow will occur. It’s necessary to keep it up to date when conditions change.

It can be difficult to manage your cash flow, especially if your company is expanding. It’s stressful to find yourself as an owner struggling for cash flow and/or extended credit while having a successful business. This is primarily due to business cycles, in which client payments are frequently received after ongoing orders have to be paid. As a result, it’s essential to have measures in place to deal with these concerns as they emerge.

Contact us today to do an overview of your cash flow statement and to provide insights on how to improve your business cash flow.

As the name suggests, cash flow is the process through which cash and equivalent assets are in and out of a business. Cash expenditures are divided into three categories: operating cash flow, investing cash flow, financing cash flow.

Operating cash flow

For entrepreneurs, this is usually the most significant kind of cash flow. Operating cash flow is simply the money that your company earns and spends on a daily basis. For example, let’s see what is included in a month operating cash flow if you have a food truck:

• Cash from food sales
• Employees wages
• Maintenance and repair
• Purchase of truck’s fuel
• Purchase of materials for products
• Insurance fee
• Advertising expenses

Operating cash flow reveals whether a business can create enough positive cash flow to sustain and develop its operations; otherwise, it may need to seek outside funding for capital growth. This provides an idea of the kind of costs and income that make up a small business’s operating cash flow. Understanding what goes into your operational cash flow and whether the result is positive or negative cash flow may help you better understand how well your firm is functioning.

Investing cash flow

Investing cash flow refers to the money generated by investments. These might include real estate owned by your company, stocks and bonds (market securities), and equipment. This sort of cash flow is not frequent in small businesses; it is more typical in bigger organizations or sectors that include the purchase and sale of real estate or equipment.

Financing cash flow

The net amount of money generated by a business in a specific time is called “cash flow from financing activities”. Issuance and repayment of shares, dividend payments, debt issuance and repayment, and capital lease obligations are all examples of finance operations. When a company has investors, money will flow back and forth from them to the company. This sort of cash flow is impossible to achieve if your company lacks investors. A huge company’s ownership structure may be complicated, with numerous investors, and cash flow may be heavily financed.

The most liquid assets owned by a business are cash and equivalent assets, but let see in detail what they are. The fundamental assets included in this definition are cash, which includes cash on hand and cash in bank accounts. Foreign money and current assets that are a stable store of value are examples of other assets. Accounts receivable, marketable securities (because of their change in value), and assets utilized for collateral and inventories are all notable assets that are omitted.

Let’s look at why cash flow is essential to a business now that we know what it is.

The Value of Cash Flow

A company’s most liquid asset is cash, which is required to execute a range of essential business activities. As a result, it is necessary to separate a company’s revenue from its cash flow. The cash flow statement, unlike the revenue statement, is exclusively concerned with transactions that affect the cash account. This is used to assess an organization’s capacity to meet its obligations as well as its potential to explore new business possibilities.

Businesses require cash for a variety of reasons, including paying taxes, paying suppliers, and acquiring new long-term assets. While a company may provide excellent credit terms to its consumers, it may not get the same benefits from its creditors. A business requires robust recurring cash flows to be agile and ready to seek new possibilities while meeting existing obligations.

When starting a new business, cash flow is one of those areas where you need to have knowledge otherwise it is advisable to rely on an accountant so as to have advice about it.

Cash Flow Management

The cash flow statement, which provides a diagnostic of a company’s health, is used to report a company’s cash flows. Along with the income statement and balance sheet, the cash flow statement is one of the three primary financial statements. The cash flow statement’s basic definition is that it reflects the inflow and outflow of cash and equivalent assets in a specific time.

The cash flow statement is divided into three areas, each of which corresponds to the purpose of the transaction’s cash. Cash flow from operations, cash flow from investments, and cash flow from financing are the three types of cash flow. These analyses can assist managers in determining which areas generate cash and which are the most significant sources of outflows.

Each of these areas’ cash flow is analyzed to establish a company’s overall cash inflows and outlaws. A business with a positive cash flow has more cash inflows than outflows. A company with negative cash flow has more cash outflows than cash inflows. A business with a positive cash flow is highly liquid, meaning it can pay its bills and settle its obligations.

In businesses of all sizes and complexity levels, cash flow management is crucial. Managers and owners must keep a close eye on their cash flow and seek to improve inflows and minimize outflows. Advanced cloud-based solutions have recently made it simpler to get business cash flow data without devoting important company resources to manually or legacy-based cash flow statements.

What’s the difference between cash flow and revenue?

Both cash flow and sales are significant indicators of a company’s performance. While cash flow refers to all of the money that enters and exits a firm, revenue refers to the money that a business generates through services or product sales.

Depending on a company’s liquidity during a specif period, net cash flow might be negative or positive. Due to poor operational management, a company might have a negative cash flow in a quarter despite soaring revenues, Increased revenue indicates a company’s sales and marketing performance, but revenue does not always imply favorable cash flow.

What’s the purpose of a cash flow statement?

A cash flow statement shows how much money comes in and goes out of a business during a specific time.

Comparing your small business’s monthly, quarterly, and annual cash flow statements may provide you a better idea of how well it’s doing, and fluctuations in net cash flow have changed over time.

A cash flow statement is also the most accurate method to assess how much cash you have on hand at any one time. Although your revenue statement may indicate a large amount of money coming in, your cash flow statement will reveal whether or not that money is available to be spent.

What is the best way to read a cash flow statement?

Not only does a cash flow statement help you monitor business performance and assess your actual liquidity, but cash flow analysis is also vital for other reasons. You may also utilize your cash flow statement to forecast future cash flow, which can aid in better planning for your company’s future.

Depending on how many sources of revenue and costs a company has, cash flow statements will differ significantly. However, cash flow statements will often include the following components:

• Operating cash flow
• Investing cash flow
• Financing cash flow
• Income
• Net cash flow

The cash flow statement will provide a breakdown of additions and subtractions to your company’s cash flow, with the net cash flow for the month being the ultimate outcome. For many entrepreneurs, the operational cash flow is the section of the cash flow statement that is most valuable in determining how well your business’s day-to-day finances are going.

Contact us today to do an overview of your cash flow statement and to provide insights on how to improve your business cash flow.