When you’re getting set up in business, one of your first trips is to the bank. So into the branch you trot with the necessary identification documents and proof of address. You’ll come back with the “Quinella” of banking - a Current Account and a Saver account, or if you’re really lucky, the “Trifecta”, which is a Quinella plus a credit card. The thinking behind signing up for these accounts is sound. Any initial investment and any excess funds will over time go into your saver account. However the banks are relying on you using these funds up and dipping into your credit cards.
Close the Credit Card, open up a few more savings accounts
The Quinella/Trifecta model is broken but typically we haven’t wanted to open more bank accounts. "Why the fuss?" and "It’s too complicated!" are pretty typical responses. As Accountants we sometimes stand in the way (“It’ll just have to be reconciled!”). But we’ve found that when you have payments coming up on the horizon, its easier to have this money socked away and ready for use in a sole purpose bank account. Then we don’t get confused looking at what’s in the bank to be spent on operating expenses, and what is needed elsewhere at another time.
Are you guilty of Bank Balance Accounting?
We’ve been guilty of it too! It’s human nature to look at your bank account to see if business is going well or not. However this can uncover some problematic behaviours when looking at payments coming up, the “can we afford it” question almost always receives a positive response when the bank balance is healthy. But is it healthy enough?
More Bank Accounts
Depending on what your business situation is we recommend opening accounts for GST, Income Tax as well as for Shareholders. The idea is that once you are paid, a proportion of income gets funnelled into these accounts and stored away until required. Operating Expenses are paid out of the remaining balance after these sole purpose accounts are paid. While this seems like a backwards way of dealing with cashflow, if you are in a tight position this can really help to prioritise payments such as Tax and Profits, and reduce expenses in your business where necessary.
Pay Yourself First
The first business book I read was Rich Dad, Poor Dad by Robert Kiyosaki. In that book the author mentions the phrase "Pay Yourself First”. With a separate bank account for shareholder money, when you receive funds from clients you can put a proportion of this into an account (without distributing it to yourself) for safe keeping. Building this bank balanace often enough will really have a positive impact on how you run your business, after all, profit is why you’re in business in the first place.
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