Money Management: The 5 Bank Accounts Your Business Must Have
Money. The constant dance between how much we make and how much we spend. Can we afford that new hire or that new piece of equipment? When can we start paying ourselves? How much should you set aside for the tax man? How in the hell is all this going to work and be sustainable?!
After 17 years in healthcare and owning my own practice, money was still the one thing that seemed difficult to get a grip on. We justify which bills to pay depending on how much we make each month. Constantly checking the bank account balance daily, making sure our teams are paid and our overhead is met, so we can be left with enough crumbs to take home. Sound familiar? How many times a week are you checking your business bank account and making sure you have funds to pay the bills?
In this blog I'm going to share with you the 5 bank accounts that you should set up for your business that will make your bank account balancing a thing of the past. This is a money management system that will encourage you to pay yourself, manage your expenses and plan for the future of your business. If you have read the book, “Profit First” by Mike Michalowicz, this blog will contain some of its teachings. If you haven’t read it, add it to your list!
Here is the exact system I use to pay myself, create profit for my business, pay all my taxes, and cover the bills.
**Disclaimer: I'm not a financial advisor or accountant. I hire people to do those jobs for me and my business and I always suggest you do the same. What am I about to share is a system for managing the money coming in and going out of your business. While most of us don’t necessarily enjoy the numbers, it is important that you understand the story the numbers tell you so that you can properly manage the money in your business.
The 5 Accounts:
Revenue/Income: This is where every dollar you make goes. You will move the money from this account into the other 4 each month. Traditionally this is the account that you have done EVERYTHING with - pay bills, yourself, your taxes, etc.
Profit: Right from the start you should take10% of the revenue you generate each month and put it in a PROFIT account. This money gets spent once a quarter on:
growing the business - new marketing, new equipment, a second location, a new staff member, etc.
crushing business debts - use 90% of the funds in this account to get ride of loans, lingering large equipment purchases, etc.
or (my personal favorite) as a distribution source to those who own the business. So, if you have a partner in your business, 4 times a year your profit accumulation will pay you a distribution as the owner
I suggest keeping 3 months of expenses in your profit account at all times, so just in case there is something crazy like a pandemic you can make up the difference in cash flow with this money
Taxes: Yes, Uncle Sam must be paid and you should be preparing for his share during the year instead of scrambling at the last minute. 10 to 15% gets moved into the tax account. This will help you pay your taxes and avoid panicking at the last minute when they come due. The exact percentage coincides with your expense margin which is discussed in next bullet points. Higher expenses for your business means less tax dollars to the tax account because of write offs. If you are profitable you should be paying quarterly estimated taxes - talk to your accountant about this. At the end of the year if there is money left over in this account, guess who gets a bonus?!
NOTE: I highly suggest you put your PROFIT and TAX accounts into a separate bank. This makes it harder for you to access this funds, thus limiting the temptation to borrow from them when you get in a pinch.
Expenses: Now, many of you have different types of businesses and therefore, different types of expenses, so I’m going to provide you with a range here.
30 to 60% of your income will go to paying the bills - rent, utilities, equipment, salaries for your staff, stationary, IT costs, etc.
obviously you need to understand the typical margins inside your industry to decide which percentage your average monthly expenses are. For my healthcare practice, our expenses are closer to 60% per $100K. For my coaching business its closer to 30% per $10K. Do yourself a favor and research your industry to find out what the typical monthly costs are.
all your arguments against this are addressed below (LOL)
Owner Salary: 20 to 50% of your revenue should be paying you as the owner each month. Yes, its your business and you should be taking the spoils. Again, higher expenses equal lower margins, so your salary needs to reflect the typical standards for your business type.
for my coaching business, I take 50% for my salary (solopreneurs without employees should follow this)
my healthcare practice, the owners share 20%
it is important that you establish a regular salary for yourself especially if you have employees. If you’re just taking distributions of varying amounts you’re going to get caught up with the IRS. Pay your payroll taxes for yourself ahead of time with a owner’s salary. The rest of your take will come in the form of your PROFIT account mentioned earlier.
Some of you are probably thinking, "Yea right Daniel. My expenses account for 80% of my business right now. There is no way I could do this."
I get it. I was once in the same boat as you and I will offer this piece of insight. As humans, if money is available we will spend it. If time is available we will procrastinate. Think about it, any time we get a raise at our job our first inclination is to take a vacation or move to a new bigger house or buy a new car. We increase our expenses based on our earnings rather than continuing to get by on what we were already making and use the increased earnings as an investment tool. Also, if I had a week to get this blog done, chances are I will use every bit of that week to put the final dots on the I’s and cross all the T’s, but if I only had one day to accomplish it - I could also get it done. This is called Parkinson’s Law and it states, “People will use the maximum amount of time and/or money in a work day to complete a task or series of tasks.”
You must, as a business owner, learn to lower your expenses. The problem is that its hard to cut costs because we feel like we NEED certain things to survive. Its hard to get rid of people because we have a conscious; however,iIt is time to get more resourceful with your money and your time. You need to have an expense account that forces you to keep your expenses under a certain dollar amount. Some of you are just spending money because it’s available, and not actually being innovative in areas where you can or going without when you can. You get more sales, you unwisely spend your money. You’re low on sales and you panic at the last minute.
Finally, these percentages are simply target percentages. Some of you may be in larger businesses that may have a larger than 60% overhead - I get it. The larger your business the larger your overhead. This means the owners salary percentage will need to go down to compensate for this; however, this is not an excuse for you to make adjustments to the percentages just because you feel like it. Try to create targets that are representative of your industry and STICK TO THEM.
Become a member of the Edgy Entrepreneur Community on Facebook and join us for Unf*ck Your Mindset Friday at 12:30pm EST on March 18th where we’ll discuss this topic in more detail, answer your questions, and help you unpack this further.
Stay Edgy,
Daniel Tribby, ATC, CEAS, ITAT, CNP
Co-Founder, The Edgy Entrepreneur, LLC
© Edgy Entrepreneur, LLC. • 51 E. Jefferson St. #3292, Orlando, FL 32802 • www.edgyentrepreneurs.com
