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.
Want to calculate how much income you’ll make this year? It’s super easy and you can do it yourself right now!
1. Figure out how much money you’ve made each month from January through June If you don’t have an accounting system, go through your bank statements and write down each deposit and add them together for each month. On separate lines, write “January $2,000; February $3,000,” etc. Don't worry about expenses. We’re just focusing on gross profit which is before expenses.
2. Take all the numbers (January through June), add them together and divide them by 6. This will give you an estimated per month income. Now, multiply that number by 12. This is approximately how much money you’ll make in in a year.
Here’s an example:
January income $2,000
Total income $14,700
Divide by 6 = $2,450
Multiply by 12 = $29,400
That’s your projected income for the year!
Keep in mind this is super basic. It doesn’t account for launching a new product or service or getting new clients. But it gives you an idea to see if you’re on track to meet your income goal!
A while back I came across a startling statistic:
What in the world is cash flow?? It's the cash flowing in and out of your business [basically income and expenses].
So what are cash flow problems and how can we solve them?
Overestimating future sales: estimating that you'll make $10k next month when you only made $1k this month and aren't actively growing your business. Solution: be realistic. Base your future numbers on those of the past and the work you’re willing to put in.
Impulse buys: spending money before thinking it through and budgeting. Solution: ask yourself if this expense is necessary and if you can actually afford it at this stage of your business. New businesses will have different priorities than those who have been around for five years. Don’t compare your business purchases to others. Create a budget and stick to it no matter what everyone else is doing.
Ignoring overdue invoices: pretending they don't exist because asking people to pay can be awkward! Solution: have clear deadlines on your invoices and policies if payments are late. For example, invoices that are unpaid after the due date are subject to a 5% late fee. I also recommend stopping work if someone’s invoice remains unpaid for 30 or more days.
Keeping a low balance in your bank account: transferring all your money into personal accounts. Solution: set up a business savings account. It is helpful to save enough money to cover 2-3 months of business expenses. This will help you get through slower times in your business. And if you need to buy something like a new computer or camera you’ll be ready!
Don’t let cash flow problems bring your business down.