Value added tax is one of the most significant factors affecting a company's cash flow, yet its impact is often insufficiently accounted for in cash flow planning. A company collects output VAT from its customers and remits it to the tax authority, deducted by input VAT. This process creates both opportunities and risks for cash flow management.
How does VAT affect cash flow?
The cash flow impact of VAT arises from a timing difference: a company invoices its customer for the price of a product or service including VAT, but remits the tax to the tax authority only later. For example, VAT collected on January sales is remitted on 12 March. This means the company has approximately 6–10 weeks to use the collected VAT funds before remittance.
This timing difference creates a temporary cash flow advantage that can be significant, especially for companies with high revenue. If a company invoices EUR 100,000 per month (VAT 25.5%), the output VAT portion is approximately EUR 25,500. This sum is available to the company for weeks before remittance.
Important rule of thumb: VAT funds are not the company's own money, even though they are temporarily in the account. Always set aside VAT remittances in a separate account or budget them carefully so that no cash flow problem arises at the time of remittance.
VAT remittance schedule and cash flow planning
VAT is filed and paid to the Finnish Tax Administration by the 12th day of the second month following the reporting period. January VAT is due on 12 March, February VAT on 12 April, and so on. This rhythm is predictable and should be factored into the cash flow forecast as a fixed expense item.
In cash flow planning, it is essential to identify months when the VAT remittance is larger than usual. Such situations arise, for example, after the Christmas season (the January VAT remittance is large) or following the invoicing of major projects. These months should be prepared for either by setting funds aside in advance or by arranging additional financing.
Extended filing period for small businesses
Small businesses can apply for an extended VAT filing period. If a company's annual revenue is no more than EUR 100,000, VAT can be filed and paid quarterly. With revenue below EUR 30,000, the filing can be done annually. The extended filing period makes cash flow management easier because remittances are less frequent and the company can use the VAT funds for a longer period.
The downside of the extended filing period is that individual remittances are larger. A company filing quarterly pays three months' VAT at once, which can be a significant sum. It is important to set funds aside in advance so that no surprises arise on the remittance date. For many small business owners, a separate VAT account to which estimated VAT is transferred weekly is an effective solution.
Input VAT and utilising the right to deduct
A company may deduct the VAT on purchases made for business purposes from the output VAT to be remitted. This right to deduct reduces the net VAT payable and improves cash flow. From a cash flow perspective, it is essential that the input VAT deduction is made in the same filing period as the purchase – not later.
If a company has significant purchases in a particular month, the net VAT payable may even be negative, resulting in a VAT refund. For example, large equipment purchases or inventory replenishment reduce the VAT payable. Timing investments and major purchases in relation to VAT filing periods is part of smart cash flow planning.
The VAT challenge of large invoices
The VAT component of large individual invoices can cause a significant cash flow spike. When a company invoices a EUR 200,000 project, for example, the VAT portion is EUR 51,000. If the customer pays the invoice only on the last day of the payment term, the company may have to remit the VAT before it has received payment from the customer.
This situation is particularly problematic because the VAT remittance obligation arises on an accrual basis according to the invoice date, not when payment is received. The company is therefore obliged to remit the output VAT even if the customer has not yet paid. Invoice financing solves this problem – when the invoice is sold to a financier, the company receives funds including VAT before the remittance deadline.
Invoice financing and VAT cash flow optimisation
Invoice financing is an effective tool for managing VAT-related cash flow. When a company sells an invoice to a financier, it typically receives 80–95 percent of the invoice value including the VAT portion. This means the VAT funds are available immediately after the invoice is sent, and no cash flow problem arises at the time of VAT remittance.
Companies in a growth phase particularly benefit from this, because as they grow, output VAT increases and remittance amounts rise. Without invoice financing, a growing company must continuously fund ever-larger VAT remittances from its cash reserves, which can slow down growth. Invoice financing frees up capital from VAT remittance risk for running the business.
Practical tips for managing VAT cash flow
Actions to optimise VAT cash flow:
- Set up a separate VAT account and transfer the estimated VAT portion of sales to it weekly
- Mark VAT remittance dates in your cash flow forecast as fixed expense items
- Time major purchases so that the input VAT deduction coincides with a period of high output VAT
- Consider the extended filing period if your revenue is below EUR 100,000
- Use invoice financing to smooth cash flow spikes caused by the VAT on large invoices
- Monitor net VAT trends monthly and anticipate deviations
Summary
📌 Summary
Value added tax has a significant impact on a company's cash flow. Understanding VAT remittance timing, taking advantage of extended filing periods, and strategically timing input VAT are key cash flow management tools. The VAT component of large invoices can cause cash flow spikes, and invoice financing provides an effective solution.
