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After listening to the Business Made Simple podcast and hearing a listener call in and ask this question, it got me thinking. Bringing in new business is great, but managing cashflow to keep the business running is much more important. After listening to their advice I took notes on what they recommended and sent the notes to two accountants as well as my financial advisor. All of them said this information is genius and it checks out, so naturally I had to share it with you! PLEASE KNOW: I am not a licensed cpa, tax attorney, or certified to give tax advice. This is not legal accounting advice.
First, create these 5 accounts
Account 1: Operating Expenses
Account 2: Tax Account
Account 3: Profit Account
Account 4: Salary for the Owner
Account 5: Investment Holding
Account 1: Operating Expenses
Your operating expenses account should hold at least 2-3 months of operating expenses. If you don't know how much money you need to keep your business running each month, start by breaking that down. Then multiple that number by 3 and that's the number to keep in this account! This account will serve as an emergency fund for your business as well as the place that all payments are made and received. Bonus: It can also work as a profit and loss statement. The threshold for this account should be 2-3 months of expenses. By checking the balance of this account you'll know where your business is at financially.
Account 2: Tax Account
Whenever you receive payment, 50% of that payment should go straight to your tax account. 50% sounds like a lot, but by putting 50% in this account, once you pay taxes you'll end up with some left over to save or put towards something else! If you're just getting started and 50% seems like too much, check to see what tax bracket you're in and only transfer the tax bracket percentage you're in. You can check to see what bracket you're in by visiting the IRS website. Here are the current brackets for 2021!
Account 3: Profit Account
This should end up having the highest amount of money, taxes will come close to this number, but at some point the tax account will drain, after taxes are paid. To get started building this account, start by transferring 1% of what's coming in and put it in this account. If you can put more than that percentage, do it! If not, start with 1%.
Account 4: Salary for the Owner
This is the personal checking account for the owner of the business. This does require you to choose a salary, so no matter how much the company is making, you're still taking the same amount each year. This teaches the owner to live off a certain percentage and actually allows the business to grow and have money for investments.
Account 5: Investment Holding
Once your profit account goes over 6 months of your operating expenses, take the overage and put it in your Investment Holding Account. The money in this account is specifically to be used for investment opportunities. A great goal for this account is to fund a SEP IRA each year. Self employed individuals can put up to $54k each year into this account. A great plan for retirement. If time is on your side, start by funding a Roth IRA each year, these accounts grow tax free! If time isn't on your side, the SEP IRA allows you to fund a lot more.
*Note: If you're comfortable with having only 2-3 months of expenses saved you can skip creating the profit account and move on directly to filling your Investment Holding account. This strategy is genius because it allows your businesses income to actually create you more income, without requiring you to work more! I'd love to hear any thoughts or questions you have! PLEASE KNOW: I am not a licensed cpa, tax attorney, or certified to give tax advice. This is not legal accounting advice.
How to Grow Your Small Business
A 6-Step Plan to Help Your Business Take Off
This book (How to Grow Your Small Business) has been an absolute game changer when it comes to managing and scaling my business. The entire financial structure is laid out in it along with so many other helpful steps too!
Updated 9/15/2022: Business Made Simple, posted these graphics on their Instagram account and I loved how simple they explained it! Enjoy!
