Let’s be honest, building a business and helping others is more fun than pouring over spreadsheets or balancing bank accounts. That’s why so many of us take the ostrich approach (head in the sand) to money management. If I just pretend it’s not a problem, I can figure it out later. Right? This feels like it works…until it doesn’t. Until a payment overdrafts, you’re spending personal money funding the business expenses, or you have a huge tax bill that you aren’t ready to pay.
This article isn’t about separating business and personal finances. I’ll touch on all the great reasons for that at a later date. I want to jump straight into action. We are going to take a short-cut to transparency.
Go With The Flow
I caught the organizing bug last year. Stuck in the house, looking at all the clutter, I found myself sucked into ‘The Home Edit’ on Netflix. Anyone else? Hundreds of dollars and countless hours rearranging later, I learned something. I discovered:
The most successful system is the one that flows naturally.
In home organization terms that meant putting my spices near the stove where I use them most. In financial terms, it means organizing my money in accounts that help me make decisions. As business owners, we don’t have the time to create a balance sheet, income statement, and/or cash flow statement every time we want to make a financial decision. We need the visibility and flexibility to make informed decisions on the spot. The most natural response to “Can I afford this?” is to check the bank account. The problem is…a bank account can provide more questions than answers if it’s not setup right.
Set Up The System
Banks
We are going to continue to leverage our habits by selecting TWO banks or credit unions to work with. The first should be local and easy to access. The second should be intentionally less easy to access (online, not local, etc.). Why? We want to create a system that reduces the temptation to borrow from ourselves. We do this by placing external barriers (distance, ease of access, ability to withdraw frequently) in the way of that borrowing so we have to think twice about doing it.
Accounts
Now that we’ve selected the two banks we intend to use, it’s time to open (or repurpose if you have existing accounts) your business bank accounts. We’re going to setup three bank accounts at your local bank.
- Income (Checking) – used for all incoming sales receipts
- Owners Pay (Checking) – used to hold and pay your salary
- Operating Expenses (Checking) – used to pay all other business expenses
Next, we setup two bank accounts at your non-local bank. Remember the purpose of the second bank is to limit the temptation to borrow from yourself. These two accounts will be:
- Profit (Savings) – used to hold your business profit for distribution or intentional reinvestment
- Taxes (Savings) – used to hold all business related taxes including withholdings for owners
Work the System
Now that you’ve laid the foundation, it’s time to work the system. Take the following daily, monthly, and quarterly steps to know where your money stands in an instant.
Daily – Direct all sales receipts to your income account for holding
Twice a Month – Allocate the balance in your income account to the other 4 accounts (Owners Pay, Operating Expenses, Profit, and Taxes) based on your needs and goals. Make sure every account has a consistent allocation percentage.
Quarterly – Pay your quarterly tax liabilities from your Taxes account. Take a 50% profit distribution from your Profits account. Meet with your accountant or Virtual CFO to discuss your allocation percentages, goals, and actual results. Adjust allocation percentages as needed.
Decision Time – Review the balance in your income and operating expense accounts to make your best decision without compromising your salary, taxes, or profit goals.
Buyer Beware
Even with this method, you may need to actually OPEN your Operating Expense account and review the transactions to make sure recurring, big ticket, or recent items have cleared before making decisions.
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