Another HST/GST misunderstanding that causes a huge negative cash flow

A little misunderstanding about HST is causing a lot of cash flow issues for many small businesses. Even worst some tax accountants have also misunderstood this concept and are not warning their clients.

When new clients come to us, after we migrate their data to QuickBooks Online and attach and integrate a few superpower apps such a Wagepoint, Receipt Bank, and a few more apps. we analyses their data as well and go through a few checkups. We have noticed and discovered that almost all of them have filed their HST incorrectly and inadvertently put themselves in a cash flow issue.

The Scenario

I’ll give you this hypothetical scenario and you can see clearly why they are not doing right.

Let’s assume that you have created a new software and it is amazing and you have made a few sales. One of your clients puts a huge order for $1,000,000. You send the invoice and charge $130,000 for HST.

The order has come at the end of your Q3, and your client said he’ll pay the bill soon.  So now you are ready to file your HST. Just based on this invoice alone, your HST owing could be $130,000. Your firm completes the HST form and submit and pays? How? I guess you had gone to the bank and got a loan or maybe had $130,000 in the bank to pay for your HST bill.

Let’s make this a bit more exciting, the client cancels the sales, he had an option to cancel at any time if he wasn’t happy with the software. So, you now have to either adjust your completed HST form or make an adjustment on the next remittance 3 months later. Meanwhile, bank is charging you interest, if you have not paid the CRA yet, they are charging you interest as well. Even worst, guess who is going to order an audit when you ask CRA to give you back your $130,000?

Impact of cash Flow

This is a huge mess, you have got a loan for $130,000, paying interest, cash flow is a down significantly, may even get a CRA audit, ….

So how to avoid this? Well HST is cash basis when I say this my clients say “WHAT?” It means whatever you collect in cash and pay in cash has to be reported and claimed. It makes a lot of sense when we have that $130K in mind.

The Solution

One of the features in QBO when you are generating an HST report, asks if you are using accrual or cash basis, choose the correct option and file your HST right.

We had a client that had a huge cash flow problem, it was a great company, they were growing very fast and needed cash for their projects. They owed a lot of money to CRA because they were filing their HST wrong. No one in management had even looked at the HST numbers and asked do we even have this money? I guess they were happy that they were successful and had great sales numbers but didn’t know the concept.  When the president and his CFO an accountant asked me how they can improve their cash flow, I looked at their HST numbers and forms and said well, you are filing this wrong. They all looked at each other and said what is “Cash Basis?” I explained it, they were still puzzled and kind of had to think about for a few hours to realized.

At the beginning I said another HST misunderstanding. The other one is Quick Vs Regular method, What?!!!!!! 😊

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