One area new businesses often get into trouble is managing cashflow.
Things starts off fine. You start winning work and the money starts coming in. Then you start spending the money.
Until one day you receive a tax bill. That’s when many businesses realise they have failed to put money aside to pay things like tax.
So how can you do things differently?
How can you ensure you always have money to pay tax when it is due… plus have money to reinvest in your new business?
One simple solution is to set up 3 different bank accounts for your business.
Let’s look at what each of these bank accounts are:
1) Operating account
The first account you’ll need one is your operating account. This is where you pay all your day to day expenses. It’s where you receive your income and pay things like:
This is your main account for everyday transactions for your new business.
2) Tax account
Many businesses become unstuck because they spend their tax money as it is in their bank account.
Often your invoices contain GST which you are collecting on behalf of the government … and you end up spending that money! Instead, start putting that money aside in your tax account as you go.
So the second account you will need is your tax account. This is where you put aside money for tax.
A simple rule of thumb is to take 10% of each invoice and put it into your tax account. You could do this each month or each week or event each invoice/
That way you’ll start accumulating money and you’ll be able to pay your tax when it is due.
3) Profit account
The third account you’ll need is your profit account.
If you have a good business model then you’ll making profit on each job you do.
Traditionally, that money ends up in your bank account and you spend it… and at the end of the year you’ll be wondering where all the profit went.
Instead, move some of that money aside into your profit account. That way you’ll know that your business is making money.
The principle is simple. Put some of your profit aside each month and then you’ll be able to make a conscious choice on what you are going to do with it.
That way as you grow your business you can decide if you will:
- Reinvest in some marketing?
- Buy some tools or a vehicle?
- Pay yourself a dividend?
The key thing is that you’re putting profit aside, so you don’t spend it as you go along. Plus you’ll be teaching your business to make profit right from the start.
So there you have it. Make you start your business with 3 bank accounts:
- Your operating account;
- Your tax account; and
- Your profit account
By setting these up and using them wisely… you’ll have better cashflow and money to run and grow a successful business.