Gift cards, the cashflow win and the catch

Gift cards are the closest thing a service business has to free working capital. Somebody pays you in November for work you will do in February, and in the meantime the money sits in your account.

That is a real advantage and it comes with a real catch, which is that the money is not yours yet.

Why they work so well

A gift card is bought by somebody who is not the customer, which means it brings you a person who has never been through your door. Redemption rates on gift cards are high, and a redeemer who has a good visit becomes a client rather than a one off.

They also land in the two weeks of the year when your diary is at its quietest and your costs are not. December gift card sales fund January, which is the single most useful thing about them.

The catch

An unredeemed gift card is a liability, not revenue. You have taken money and you owe a service. If you have sold £4,000 of gift cards and spent £4,000, you have spent money against work you still have to deliver, at whatever your costs are when the customer finally books.

Treat gift card money the way you treat deposits. It is in the account, it is not in the profit, and the balance outstanding is a number you should be able to state at any moment.

The VAT wrinkle worth knowing

UK rules distinguish between a single purpose voucher, where the VAT treatment of what it buys is known at the point of sale, and a multi purpose voucher, which can be spent on things with different VAT treatments. The point at which VAT is accounted for is different for each.

For most service businesses selling a card redeemable against anything on the menu, the practical effect is that VAT is dealt with at redemption rather than at sale. Do not take that as advice. Ask your accountant once, write the answer down and apply it consistently, because getting it wrong for two years is a tedious thing to unpick.

Expiry, and being fair about it

Expiry dates are allowed and a very short one is asking for a complaint. Terms in a consumer contract have to be fair, and a card that quietly dies after six months while the customer was waiting for a diary slot is the kind of term that gets challenged and should be.

Twelve to twenty four months is the usual range. Whatever you choose, put the expiry on the card itself, on the receipt and in the terms and send a reminder before it lapses. Businesses that remind people get redemptions and goodwill. Businesses that stay quiet get an angry phone call and a refund they did not have to give.

Practical settings worth getting right

• Make the balance partial. A £50 card spent on a £38 service should leave £12, not vanish. Card holders who lose change do not come back.
• Never allow a gift card to be exchanged for cash. State it plainly on the card.
• Record who bought it as well as who redeemed it. The buyer is a customer too and nobody ever markets to them.
• Let people buy online, at any hour, with instant delivery to an email address. Most gift cards are bought in a hurry by somebody who has left it late.
• Reconcile the outstanding balance monthly. If your system cannot tell you the total value of live gift cards in one number, that is the first thing to fix.

Gift cards are one of the few things in a small business that improve cashflow, bring new people in and cost almost nothing to run. They just need to be treated as the debt they are until the day somebody sits in the chair.