Pennies from Heaven

"Always act in accordance with the dictates of your conscience, my boy, and chance the consequences."

 "The Pirates of Penzance," W.S. Gilbert

When we listen to the stories which clients bring us about their current financial situation we sometimes hear of loan repayments which have been missed or agreements which have been broken. Stuffing the tax demands at the bottom of the sofa (it happens……) doesn't help.

Paying bills on time when there is no apparent money to cover them may seem like too big an act of faith but miracles can occur even in the mundane world of finance as I learned a long time ago.

In 1984 I was appointed financial director of a manufacturing company near Birmingham which had changed owners a couple of years earlier and dismissed the existing directors. The new Board, of which I was now a member, was seeking to drag the company back into profit after sustaining a substantial loss the previous year. We managed to achieve this by the end of 1985 although there were some areas which still had room for improvement.

One area of particular concern was the state of the company's cash flow - something which is easily confused with profit. As one financial mentor put it to me "no company ever goes bust for lack of profit, only for lack of cash" the implication being that accountants are able to conjure profit out of thin air whereas cash is cash - or so I thought……

The Managing Director, a seasoned hand in the industrial mills of the West Midlands, decided that one way of improving the figure for cash in the accounts submitted to head office each month was to delay the payment of the money due to the Inland Revenue - or Her Majesty's Revenue and Customs as it is known these days.

So, for example, in the month in question the tax deducted from wages and salaries in February of £100,000 was due to be paid on 19th March but the instruction I received was to delay this payment until 19th. April. This would increase the amount of cash shown in our balance sheet at the end of March and keep it in line with the budget. (which had been prepared on the assumption that we continue to pay our tax beyond the legal date).

Only a couple of years earlier I had been part of a management team in a different company which had been congratulated by the Group Chairman for extending our credit period from 90 to 120 days - we were paying for goods four months after receiving them - somehow it didn't quite seem right to me, even then.

Much has changed since 1987 when this incident occurred.

This game with the Inland Revenue had been going on for well over a year and my chartered accountant's conscience was becoming increasingly uneasy about it.

I had a few days holiday booked at the end of March and, before leaving, instructed the cashier that the £100,000 due on 19th. March should be paid by the end of the month. Although the payment was still ten days later than the legal requirement it was at least in line with a concession I had obtained from the Inland Revenue.

Since the cheque would not be presented until the first day of the following month we would still keep it in our cash figure and the Inland Revenue -  even though they wouldn't receive the cheque until April - would treat it as an March receipt on the basis that the date on the cheque was 31st. March.

As I said, accounting for cash is not always as straightforward as you might think……

I duly had my weekend break without giving the situation much more thought and returned to work the following week where I met with the heads of the various sections to review what had happened in my absence.

I ascertained that £100,000 had indeed been paid to the Inland Revenue and carried on with my meetings while wondering whether I would be sacked by the end of the week.

The debt collection manager was the last head of department I saw and she was distinctly happier than usual.

Our largest customer, she told me, whose average monthly account ran to about £100,000 always settled on the 5th. of the month so we were expecting that their payment would be in received in the next few days. However, our debt collection manager informed me that the customer had called the previous week and asked whether, on this occasion, they could settle before the end of the month and make the payment for the following month a month in advance.

The manager could never recall this happening in the twenty years she had worked at the company and it never happened again as far as I know but, on the one occasion when I had gone out on a limb and ensured that money was paid when it was due (or, at least, in accordance with the dispensation granted by the Inland Revenue) money was arriving in our bank in double measure.

I had been preparing to show a figure in the balance sheet £100,000 worse than budget (and, at worst case, was worried I might lose my job as a consequence) but I actually finished up reporting a cash balance £100,000 better than budget.

The Managing Director was puzzled as to why we had such a splendid result which I think I put down to an "overall improvement of cash management techniques" or some similar piece of nineteen-eighties management speak…….

The reward for paying bills when they are due may not always be quite as spectacular as in this story although we have heard of many instances where there has been some sort of unexpected and unexplained benefit very soon after an overdue repayment was made or renegotiated.

However, even without any material reward, paying on time does seem to bring about a certain serenity and peace of mind - qualities which are at the heart of every Life Plan.

© Jonathon Clark 2016

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