When Strategic Funding was in its early days we began to look for bank lines of credit so that we could expand our business of financing small businesses across America.  The banks liked the idea of working with an alternative lender as it gave them a way to indirectly serve that market without the direct risk of lending to Main Street businesses. Strategic became the borrower and, in turn, provided working capital directly to the individual small business.  This was necessary because so many small businesses lacked the financial management skills to provide adequate financial statements and cash management disciplines to qualify for bank loans.

Because many of us were once small business owners we understood our typical small business customer better than the banks. Cash flow determined how sound their businesses were, but certain traits were common amongst our applicants.  Many of the applicants had tax delinquencies, liens and judgments against them.  This was unfathomable to bankers who assumed that paying your sales tax was a priority – not understanding that keeping the lights on, meeting payroll and inventory took precedence. We also know that how the business owner managed their tax payments and general cash flow was as important as how much it was. We understood these customers well and could help many of them through education and often an injection of working capital to get them on the right path.

When I owned my first restaurant a hundred years ago, I experienced the wrath of the taxing authorities when I missed successive tax payments as I was trying to survive my maiden voyage in this business.  I was so busy managing, cooking, covering vendors, paying utilities and keeping the place clean and well staffed that I didn’t pay much attention to the mounting taxes. I thought it could wait and thought the state would offer me an easy and manageable payment plan. I’d be happy to pay reasonable fees and interest since I hadn’t put the funds aside. I looked at it as a loan from the government. That was just delusional on my part.

One day just before Christmas, I got a call from my bank telling me that revenue officers had come to the bank and levied my accounts. They grabbed everything in them and everything I had just deposited from the previous business day – including the revenue from that big fat holiday party I did.  I had never even heard the word “levy” until that day.  Now I was in real trouble as I had no money for my vendors, landlord or payroll. I was dead in the water. All my credit card receipts were being processed and were going directly to pay the taxes. By this time I woke up – the judgment amount had doubled my outstanding balance as penalties, interest and fees surpassed the liability.  As a new business owner I was in trouble and realized I had made a dumb move that I vowed would never happen again.

Over the years, I opened up more businesses in a variety of industries. Each state I operated in had it’s own system for collecting sales tax and, of course, you always had the Feds to deal with on payroll taxes.  Regardless of the state or the payment schedules, I put procedures in place to prevent this costly error from ever happening again.

RULE #1 – SALES TAX COLLECTED IS NOT YOUR MONEY!!  You need to realize that you are just holding this money for someone else – as if a customer left her purse at your business. It’s not yours and you will return it to them.  Many small businesses charge and collect sales taxes as they are required to do. The real mistake comes when owners use the sales tax revenue as part of their operating capital.  They float their operations with sales taxes money to keep them from going negative. They do this until taxes are due and hope the funds will be available when they have to file. Well, guess what?  Very often they can’t scrape together everything they owe and end up either not filing the return (really bad) or filing the return and sending a partial payment (better – but still bad).

If you need to use this money to steady your financial boat then you really need to evaluate the health of your business.  Without using tax money, is your revenue enough to cover your expenses, payroll and direct operating costs while yielding you a profit? If you are using tax money you aren’t making it and need to take a hard look at your business and figure out how to fix it.

I recommend that you immediately separate and impound the sale tax funds in a dedicated “tax account” – every single day.  That means when you close out your register for the day – identify the sales tax charged to customers and collected by your staff and separate it.  That amount includes any taxes charged to a credit card even if you have to write a check to cover it. Impound those funds and deposit them directly into the separate dedicated tax account.  Get it out of your cash flow. This makes it available and easier to track, audit and account for.

Resist temptation. Do not raid this account if your operating account is short.  Set up a relationship with your bank or an alternative lender to provide working capital  when needed. It’s easier and less costly to work it out with them and pay their fees then risk being short on tax payment day.  The other dark truth is that liability from tax delinquency will also follow you personally even if your business fails and you have to file bankruptcy.  Tax obligations are not discharged in bankruptcy so you are on the hook forever. They will never go away and will compound at an astronomical rate. A very expensive mistake.

A good tax policy and strategy will help your business stay healthy and grow.  If you want to discuss your business questions, you can email me at [email protected]