Professional Documents
Culture Documents
planning to reduce
liabilities
Daniel Broekhuizen
Ruth Felsing
Hafiz Choudhury
Importance of indirect
taxation
World Bank/IFC global project, Doing Business, on investment
100 units
100 units
+20 VAT
+20 VAT
120 units
120 units
Payment of VAT
Payment of VAT
Measure of speed = BEP
Measure of speed = BEP
X
X
20
20
Collection of Debt
Collection of Debt
Measure of speed = DSO
Measure of speed = DSO
Critical Point
Critical Point
High DSO is where DSO >
High DSO is where DSO >
BEP i.e. on the average
BEP i.e. on the average
sale, VAT is paid before
sale, VAT is paid before
the debt is collected
the debt is collected
X
X
Time
Time
120
120
From Customers
From Customers
DSO (Europe) Y/e Feb 2003
DSO (Europe) Y/e Feb 2003
Estimated @ 60
Estimated @ 60
Due
DueDate
Date(+30)
(+30)
VAT
VATReturn
ReturnPeriod
Period(90)
(90)
BEP
BEP(75)
(75)
Month
Month11
30
30days
days
XX
Month
Month22
30
30days
days
Month
Month33
30
30days
days
Period
Periodof
ofgrace
grace
30
days
30 days
Assuming
AssumingFlat
Flatdistribution
distributionof
ofsales
salesan
anAverage
Averagesale
saletakes
takesplace
place
on
45th
day,
leaving
45
days
to
the
end
of
VAT
period.
Add
period
on 45th day, leaving 45 days to the end of VAT period. Add period
of
ofgrace
graceto
tothis
thislatter
latterperiod
periodto
toestablish
establishBEP.
BEP.AAskew
skewin
insales
sales
towards
the
period
end
or
payments
on
account
will
lower
towards the period end or payments on account will lowerBEP.
BEP.
Sales a/c
Sales a/c
100 (a)
100 (a)
VAT a/c
VAT a/c
20 (b)
20 (b)
20 (a)
20 (a)
Debtors a/c
Debtors a/c
120 (a)
120 (a)
Cash a/c
Cash a/c
20 (b)
20 (b)
Key
Key
NIBCL = Non-Interest Bearing Current
NIBCL = Non-Interest Bearing Current
Liabilities
Liabilities
Sales
Salesa/c
a/c
100
100(a)
(a)
VAT
VATa/c
a/c
Debtors
Debtorsa/c
a/c
100
100(a)
(a)
(a)
(a)Sale
Salemade;
made;and
and
(b)
Nil
VAT
return
(b) Nil VAT returnrendered.
rendered.
Cash
Casha/c
a/c
Cash Released
Summary of Working Capital (1)
Summary of Working Capital (1)
Slide
Slide
Reference
Reference
Accounting
Accounting
Definition
Definition
#4 (status quo?)
#4 (status quo?)
100
100
120
120
#5 (future state)
#5 (future state)
100
100
100
100
Difference
Difference
0
0
20 Decrease in WC*
20 Decrease in WC*
Operations
NOPLAT
WCR
Free Cash
Flow (FCF)
Operations
NOPLAT
Tax point
deferral
Free Cash
Flow (FCF)
In other words,
NOPLAT (water) still goes to
the bucket
But water from the sponge is
also squeezed out
The additional cash contributes
to FCF and adds to SHV
After Y1, the business returns to
an improved steady state.
Thus the sponge continues to be
squeezed so WCR is managed
and does not grow at the same
rate as total revenue
Other metrics
Policy concerns
Organizational trends