How VAT Affects Cash Flow and How to Plan for It

Value Added Tax (VAT) can significantly impact your business’s cash flow if not properly managed. While VAT is a tax you collect on behalf of the government, the timing of collection versus payment can create cash flow challenges especially for growing businesses.

1. VAT is Collected Before It is Paid to KRA

When you issue an invoice with VAT, you are required to remit that tax to the Kenya Revenue Authority (KRA), typically by the 20th of the following month. However, your customer may delay payment, leaving you to fund the VAT from your own cash reserves.

Example:
You invoice KES 116,000 (KES 100,000 + KES 16,000 VAT). If the client pays late, you must still remit the KES 16,000 VAT on time—out of pocket.

2. Input VAT Offsets Can Ease the Burden

You can claim input VAT on your business expenses to reduce your VAT payable. However, timing is everything: if your expenses fall in a later period or are not documented properly, your offset won’t match your payable VAT, affecting cash flow.

Tip:
Match purchases and sales closely and keep accurate records to maximize input VAT claims in the right period.

3. Delayed Payments From Clients Create VAT Strain

When clients delay paying you, VAT payments still fall due. This can drain working capital and delay other operational needs like salaries or restocking.

Solution:
Set clear credit terms, follow up promptly, and incentivize early payments (e.g., discounts).

4. Zero-Rated vs. Exempt Sales

Zero-rated supplies (like exports) allow input VAT claims. Exempt supplies (like financial services) do not. Businesses with mostly exempt income may suffer cash flow strain, as they cannot recover VAT on purchases.

Strategy:
Understand your product/service classification and plan for unrecoverable VAT when pricing and budgeting.

5. Plan Ahead for Monthly VAT Obligations

VAT returns are due monthly. Businesses that don’t proactively plan for this can be caught off guard.

Pro tip:
Create a tax provision account and set aside VAT collected each month—don’t treat it as working capital.

Note

VAT is not just a tax issue, it is equally a cash flow issue. With proper planning, you can stay compliant without hurting your liquidity.

Need Help Managing VAT?

We help businesses plan, track, and manage VAT obligations to maintain healthy cash flow and avoid penalties.

📍 Biashara Plaza, Moi Avenue, Nairobi
📧 info@blueoceanoutsource.co.ke
📞 +254 729 842 847

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