Instead the book Profit First recommends opening five checking accounts to operate your business. I personally like a modified approach using four accounts. Those four bank accounts are:
How do I use these accounts? Some tips for you:
First, how much to transfer? Start with sending 15% of income to the Tax account, 5% to the Profit account, and 30% to the Operating Expense account. For example, if $1,000 is deposited into the Income account you’ll distribute it as follows:
$150 to Tax
$50 to Profit
$300 to Operating Expense
You’ll also want to pay yourself 40% (so, $400 in our example) by transferring it to your personal bank account.
Second, when should you make the transfers? Twice a month is plenty. Pick two days a month to make all your transfers. The second and fourth Friday of the month will work or you can do the 10th and 25th of the month like Profit First recommends.
Finally, always allocate the money before spending any of it. Don’t pay your bills from the Income account then transfer the remaining money to the other accounts. You must get in the habit of making transfers first then paying bills from the money in the Operating Expense account and no where else.
Note: these percentages are only estimates. If you find yourself not having enough money each month either reevaluate your spending or increase/decrease the transfer percentages as needed.
Yep, it’s true. If you operate out of one checking account some of the money is for taxes, some is to pay yourself… and the remainder is to pay expenses. If you think that all of it is available to pay business expenses you’ll never pay yourself and have a real problem come tax time.
You really should save that. What am I talking about? Money, your business's money more specifically. Saving money is important even (especially) for your business. You should save for two things: taxes and emergencies.
Taxes. Most experts recommend putting aside 25% of your gross profits for taxes. Remember this formula:
- Total Expenses
= Gross Profit
Take your Gross Profit number and multiply it by 25%. Set this amount aside for taxes. I recommend a separate savings account so you won't be tempted to use it throughout the year. Use the money to pay tax estimates and any other tax due in April. If you have money left in the account after that give yourself a bonus by transferring all remaining money to your personal account!
Bonus Tip: hire a CPA to customize your tax savings plan and thus save you a lot of time and stress.
Emergencies. The other savings you should have is for emergencies and unforeseen events. Eventually your computer is going to give out or your camera become outdated. Don't wait until these things happen to save or worse yet put it on a credit card you cannot pay off! Use a business savings account to provide a buffer when emergencies arise, clients cancel, or you equipment needs updating. The amount to save will differ from business to business, but I recommend 3-6 months of typical business expenses. For example, if your expenses in a typical month are $500, you should have a business savings of $1,500-$3,000. You may also choose to save additional money if you know a large expense is coming in the near future (like attending a conference or purchasing a course).
Do you save money for your business?