The Contractors Guide to Handling Cash Payments
I doubt whether there is any other industry in the country where cash payments to pay for goods and services are so frequently made. Small jobs are often paid for by cash as this is still the preferred method for many householders and others.
Of course there is nothing wrong with paying by cash and sometimes there are good reasons why people use this method of payment. However, it is down to the integrity of the builder to ensure that cash is accounted for in the accounts. The burden is with the builder doing the work to disclose the income and pay the tax, not with the payer. If a cash job is not accounted for, there could be serious repercussions for everyone.
Advantages of Cash Payments
- It encourages people not to borrow on credit cards. The indebtedness of many people can be traced back at the ease with which credit cards are made available when people don’t have the money or the resources to pay for what they borrow. If only cash was used, debt would be much more under control.
- Builders with a poor credit line can pay for goods and materials. Many suppliers will not supply unless they are paid by cash.
- It makes it possible for people to trade even when they do not have a bank account. There is no need for a bank reconciliation before knowing how much you can spend.
- Don’t have to wait for the client’s cheque to clear, no risks attached to cash in this sense.
- Cash keeps the “local economy” moving. If people were forced to use cheques or bank transfers to make payments (so that every transaction can be traced), this would have the effect of making the economy even slower than what it is, reducing revenue for the government.
- Cash can provide the “feel good factor”. There is a big difference between holding notes in your pocket and holding a piece of plastic in your pocket. Cash can make you more positive about work and yourself.
- Cash will attract a discount. Plastic (Credit Cards and even Debit cards) is often the reason why a surcharge is applied.
To ensure that these benefits are protected always issue an invoice and inform your accountant
Disadvantages of Cash Payments
- It can lead builders and those who receive a service to use cash for the wrong reasons. If the reason is to avoid tax both the builder and the householder are potentially breaking the law. The builder may be thinking about not disclosing the income to save income tax whilst the householder is thinking about saving the VAT.
- It can reduce the protection due to the householder. For example what guarantees are there that a fault with the work will be rectified, is the work fully guaranteed?
- Cash can be stolen.
- But the biggest reason for not using cash has to do with developing the correct business culture and I explain this below as a separate business point.
Why is not using cash good for your business?
Some people have used the moral ground to discourage people from using cash when paying for services or work done. This is on the basis that cash payments will tempt both the builder and the householder to misuse the freedom we have of using cash (Please see above).
In my experience, however, the basis for a change of culture in the way builders or anyone else does business must be based on a commercial ground and not on a moral one. Of course honesty comes into it but what moves a person to change his culture is the growing confidence that not disclosing cash payments is not good not just for business in general, but more importantly for his business.
The best example I can think of his an ex-client who during his business life has gone from one business failure to another. What was the reason? I believe it had to do with the fact that cash dealings were too large and undisclosed. When I took over about 3 years ago I fought to introduce the correct culture in his business, full accountability for every transaction, but in the end I realised I was fighting a losing battle. That business lasted less than 2 years. When he started again I was not the accountant anymore.
Why is not disclosing cash bad for the business owner?
It is bad because a business like the one described above will always be disorganised and unable to structure itself into a sustainable growing entity. The real performance of the business cannot be measured, nothing is certain and not disclosing the income likely means that a lot of expenses are also based on cash dealings and not accounted for. A culture like that spreads to other areas, estimates can become sloppy and even the quality of the work is poor, as limited guarantees can be offered if any at all.
I did not succeed with this client, but I have been successful with one or two others who have thoroughly accepted my argument that being organised and transparent generates confidence as the business is built on a good foundation and it can be managed and monitored as it grows. The overall culture then generates trust and a good reputation develops, which in turn means more referrals.
If you need to use cash, make sure the cash is accounted for, but overall don’t make it a practice. When you do receive cash always issue an invoice or a receipt.
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