Why I Have 3 Bank Accounts for My Business: Making Your Money Work for You
Via Danielle Moss.
This is a post for my sole trading friends and business owners who are looking for a way to manage their cash flow and give it the best possible chance of working for you (i.e. making you money) along the way.
It’s not fun having to log your money movements, update your balance sheet or manage your end of quarter expenses.
It’s even worse when you get to tax time and you’re hit with a MASSIVE bill you weren’t expecting to be so high.
Don’t you just wish you had made things a little easier on yourself?
Going through your account with a fine tooth comb looking for which expenses were “business expenses” and which were personal is no fun at all!
Fortunately, there is a pretty simple solution to this and also, a few other ways to get your finances in order and your money working for you.
If I’m to be completely honest, when I was an employee working for other people, I was notoriously bad at lodging my tax and while I a pretty good saver, not great with keeping on top of my money movements and making my money work for me.
I would procrastinate and get a little anxious about money .
Until alas, one day it caught up with me and due to being promoted a number of times within a short period (4 times in 12 months), I was hit with a pretty decent sized tax bill.
After years of not really worrying about my finances and often expecting a tax refund you can imagine, it came as quite a shock, and I wasn’t very happy about it…
So when I started running my own consultancy, I promised myself I wasn’t going to let myself be surprised by a tax bill (or any other bill for the matter) again. I was going to get on top of my finances, and find a way to efficiently and effectively manage my cash.
So from day 1 of business, I went straight to the bank and opened myself 3 new accounts, calculated roughly how much tax I would need to set aside, and made sure I could get my money to work for me while it was waiting to be given to the Government.
I would have loved to of read about how others manage their business expenses before I started my biz, so I thought I would jot down my process for others.
Of course, everyone will have different account options available to them depending on where they live, but overall I think the principles should apply no matter where you are in the world.
1. Have an Everyday Account
This is the account that most people would have already for personal reasons. I have a personal everyday account and a business everyday account (with a card attached). This is the only account that transactions occur from.
All bills, expenses, commissions and pays are transferred from this account.
This means that whenever I need to lodge my business expenses every quarter (in Australia we need to lodge a Business Activity Statement) I can simply download all transactions in excel and balance them in my spreadsheet. Easy peasy.
Most everyday accounts don’t have a particularly great interest rate. That’s why I like to make sure there isn’t a lot of cash sitting in this account at any one time. It’s also generally good practice just in case you lose your wallet. With “pay pass” these days it’s becoming increasingly difficult to keep your finances secure.
2. Have a Higher Interest Rate: “Business Happens” Account
I want to start by saying that “business happens”.
While it’s ever much fun, we know that from time to time we are likely to see some emergency expenses. That’s just the cost of working for yourself in business.
Whether your computer dies, you have to move offices because your landlord is selling or one of your staff resigns and leaves you having to hire a (more expensive) contractor while you’re working to find a replacement.
It’s just bound to happen at some point. So we might as well plan for it and make a little extra cash along the way.
Everyone’s amount to keep in this account will be different depending on your circumstances.
For me, I like to keep a month’s worth of “must have” expenses (i.e. what it would cost to cover myself for a month of no sales) as that’s what feels most comfortable to me.
If you have a number of staff, an expensive office and a room full of equipment, you may need to keep a bit more aside.
While it might be tempting to use this money to invest in a new hire, a new piece of equipment you really want (but don’t NEED) or anything else, don’t. This is your “emergency” only account.
In fact, I wouldn’t even organise to have a card for this account. Many banks allow you to keep accounts “online only” so that you have to transfer funds from this account to your “everyday account” to access it.
When it comes to investing in your business growth and managing your larger expenses (like tax) that’s what the next account is for….
3. High Interest Account
This is where we can really let our money work for us. In this account, I set aside some money that I may want to allocate to business growth (making a new hire, upgrading equipment, conference tickets etc.).
In addition, I also set aside the money I will need to pay Mr Taxman at the end of the financial year.
I know that it is often recommended to “pay yourself first” but to be honest, I never really understood that. I mean, yes, you need to make sure you have food on the table, but well, you’ve heard that saying haven’t you? Nothing is certain in life but death and taxes? Yeah. Not really a bill you can get away with not paying. If you need to buy yourself some time, then by all means, “pay yourself first” but if you’re somewhat risk adverse or just generally don’t like being surprised with large bills, then feel free to subscribe to my line of thinking which is more along the lines of “take out the money for the tax man and keep everything else”.
So first thing is first. We need to calculate how much we will need to set aside for Mr Taxman.
The best way to do this is to estimate how much you are likely to earn in the year and then look up your relevant tax percentages for that income bracket (for my Aussie friends, you can find the ATO tax table here and a handy tax calculator here).
Be sure to take into consideration any other loans and levies you may have. Check the individual guidelines and tax rules in your country.
In Australia, we are fortunate enough for our Government to give us a loan for tertiary studies. So I have a university debt that I will be slowly paying off for the next few years. This needs to be taken into account when calculating how much money I set aside for my tax return.
Although not everyone will have the luxury to do this, I would recommend setting aside a bit more than you may need.
After all, when you do lodge your return, it’s always much nicer to have a little money “back” than being hit with a bigger bill than you were expecting right?
So back to the account itself. I choose a high interest account to hold this cash because it doesn’t move around as much as the money in my “everyday account”. Some banks will give you an incredible interest rate if you’re not planning on touching your money for a while.
Why bother? Well depending on how much you need to set aside, keeping your cash in a higher interest account can give you an additional (small) fist full of cash to spend at the end of the year.
What I like to do is give myself a reward. I will often use a portion of that interest that was accrued to give myself a “business treat”.
It might be a new tablet, leather laptop case, conference ticket, new blazer – whatever!
I find that it’s also a nice thing to do for yourself at the end of a year as a “job well done” gift.
I like to purchase something of high quality that I will remember. A piece of jewellery, a designer handbag, something I will have for years. That way I can look back and remember my “business milestones” which I find to be a nice little nostalgic activity.
An Additional Note on High Interest Accounts: Often with high interest accounts there will be some guidelines for when and how you can add and remove funds from the account. The account I have requires a certain amount to be deposited each month and only allows you to make two withdrawals if you would like to keep earning at that high interest rate, so just be sure to check the guidelines for your account set up to make sure you’re maximising your possible return!
Money Management Spreadsheet:
Setting up your accounts correctly is just the first step. This makes logging your expenses extremely easy. With internet banking these days, you can download your money movements with the click of a button, and if you’re a little handy with excel, you can set yourself up with a spreadsheet that makes horrid accounting – not so horrid.
Here’s a quick run down of what I do when lodging my Business Activity Statement (BAS). Just note that tax and BAS guidelines are likely to be different from country to country so definitely be sure to check with your local accountant.
Pssst. For anyone based in Brisbane looking for a brilliant accountant, my accountant JD at Verve Accounting is pretty amazing.
Log Your Income:
On the left hand side of my spreadsheet, I log every amount of money I gained to my account along with the date it came through.
DATE | INCOME $ | GST TAX
Then I calculate the tax on this total amount.
In Australia, we pay GST which is a 10% tax. So to get this amount, I create a new column and divide my total income (inclusive of GST) by 11 to get 10% of the amount.
I sum the figures and add the total amount as the last line in the spreadsheet.
Log Your Expenses:
Just next to my income columns, I list my expenses under the following columns.
NAME OF EXPENSE | AMOUNT $ | GST ON EXPENSE* | NOTES
*Just make sure you check which of your expenses have tax that you are able to claim. Many online transactions (like software) don’t contain a taxable amount so just be sure to double check.
Once I add all of the total amounts – that’s pretty much it!
I have a separate spreadsheet for invoice reconciliation, forecasting, sales and revenue goals.
Let me know in the comments if you would like to hear more about how I manage other aspects of my business finances.
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