Cheap and Fast Liquidity: Is Postponing VAT and AHV/AVS a Feasible Path?

In financial planning, maintaining liquidity is essential for smooth business operations. For growing companies, managing liquidity can be particularly challenging due to additional investments required for scaling, such as funding new inventory, hiring staff, and expanding infrastructure.

In certain situations, such as delayed investor funding, postponed customer payments, or unexpected delays in signing contracts, there is often a need to boost liquidity in the short term. One controversial strategy to enhance liquidity that I’ve come across is postponing VAT (Value Added Tax) and AHV/AVS (social security) payments. While this approach can provide quick and cheap liquidity, it carries significant personal liability risks in case of bankruptcy and must therefore be managed with extreme caution.

Understanding VAT and AHV/AVS Postponement

What is VAT Postponement?

VAT is a consumption tax levied on the value added to goods and services. Businesses collect VAT from customers on behalf of the government and are required to remit this tax periodically. By postponing VAT payments, a business can temporarily retain the cash collected from customers, thus improving its immediate liquidity.

What is AHV/AVS Postponement?

AHV/AVS refers to the Swiss social security system, which includes old-age, survivors, and disability insurance. Employers are required to pay contributions to this system on behalf of their employees. Postponing these payments allows a business to temporarily retain cash that would otherwise be used to fulfill its social security obligations.

The Risks and Benefits

Benefits of Postponing VAT and AHV/AVS Payments

1. Immediate Liquidity Boost: By postponing VAT and AHV payments, businesses can access funds quickly to cover urgent expenses or investment needs.
2. Cost-Effective: Compared to other financing options like loans or credit lines, postponing tax payments can be a cheaper way to obtain liquidity.
3. Flexibility: This strategy provides flexibility to manage cash flow in times of financial strain or unexpected delays in revenue.

Risks of Postponing VAT and AHV/AVS Payments

1. Personal Liability: In case of bankruptcy, business owners may face personal liability for unpaid VAT and AHV contributions. This can lead to severe financial and legal repercussions.
2. Penalties and Interest: Delaying payments can result in penalties and interest charges, increasing the overall financial burden on the business.
3. Reputational Damage: Consistently postponing tax payments can harm a company’s reputation with tax authorities and other stakeholders.
4. Short-Term Solution: This approach provides only a temporary fix and does not address underlying cash flow issues or financial mismanagement.

When to Consider Postponing VAT and AHV/AVS Payments

While postponing VAT and AHV payments can be a feasible short-term strategy, it should only be considered under specific circumstances:

1. Assured Liquidity: Ensure that future cash inflows are guaranteed and will cover the postponed payments without jeopardizing the business.
2. Break-Even Point: Use this strategy when additional payments are expected to guarantee a break-even point or to bridge a short-term liquidity gap.
3. Clear Repayment Plan: Develop a clear plan for repaying the postponed amounts, including a timeline and sources of repayment.
4. Professional Advice: Seek advice from financial and legal professionals to understand the full implications and to ensure compliance with regulations.

Alternative Strategies for Improving Liquidity

If postponing VAT and AHV payments seems too risky, consider these alternative strategies to improve liquidity:

1. Invoice Factoring: Sell outstanding invoices to a factoring company to receive immediate cash. This improves liquidity without incurring debt.
2. Short-Term Loans: Obtain short-term financing from banks or alternative lenders to cover immediate cash needs.
3. Cost Management: Implement cost-cutting measures to reduce expenses and improve cash flow.
4. Negotiating Payment Terms: Negotiate extended payment terms with suppliers to defer cash outflows.
5. Asset Liquidation: Sell non-essential assets to raise cash and improve liquidity.

Conclusion

While postponing VAT and AHV payments can provide quick and cheap liquidity, it comes with significant risks that must be managed carefully. This strategy should only be considered as a last resort and under specific circumstances where liquidity is assured and a clear repayment plan is in place. Exploring alternative strategies for improving liquidity can provide more sustainable solutions without exposing the business to undue risk.

Ultimately, maintaining a proactive approach to liquidity management, seeking professional advice, and implementing sound financial practices will help ensure the long-term financial health and stability of your business.