What about bank accounts?
This is a question that I actually get asked fairly frequently. Once we start talking about budgeting, forecasting, and paying yourself a regular salary, it's essential to get your banking organized.
I have worked with all kinds of business owners. Some of them need to separate all of their essential payments, while others simply want one checking account for money frequently coming in and out, and one savings account for taxes. If you find a way that works, then by all means, continue with whatever method works best for you.
There is no tried and true method
What's most important is that your system allows you to pay for everything you need to cover consistently and you're not bleeding red for your annual estimate. Once your business grows, and you have multiple employees, you'll absolutely need separate accounts (payroll, taxes, insurance, etc.), but if you're a solo-entrepreneur, you have the ability to be a little more flexible.
When it comes to bank accounts, I like to take a page out of Dave Ramsey’s book. I treat bank accounts like budgeting buckets. I have 5 separate business accounts, but at minimum, I recommend having three accounts:
Standard CHECKING Account - All of your money flowing into this account before being distributed to the others. This account is also used to pay business expenses.
TAX Savings Account - Most tax accountants that I’ve talked to have recommended putting 15% of revenue into a tax account. Keeping a percentage of your revenue in a separate account will help you to not only save for taxes, but also help you feel less like Uncle Sam is depriving you of that tasty lens you've been eyeing. Intentionally separating your money will give you more immediate clarity when you log-on to view your accounts.
SALARY Savings Account - Find a percentage of your revenue that fits your business model and separate the money that you want to pay yourself so that you can pay yourself regularly instead of just when you’re experiencing the peaks. If you're an LLC, transfer money to your personal, family account from this account. If you're a Corp, this is your payroll account.
Padding this account is also a great idea. If another recession occurs, or Amazon starts to take over your industry (because they're taking over the world one industry at a time), you have some time to strategize and decide your next move while still paying your personal bills. Those rent/mortgage collectors don't want to hear excuses. Many financial experts that I've talked to will recommend 6 month of salary savings.
Managing these three accounts successfully will help you organize your year,
prioritize your spending, and start to plan for growth.
If you're one of those overachievers, or just want to know what my other accounts are earmarked for, here are a few ideas for optional/growth accounts:
- The FUN Account - If there is something you've been eyeing that is out of reach based on your annual projections, use a fun account as your motivator. Once you've reached your quarterly goals put some of the extra money into this account. You can use it to buy that new camera body that just got released, or to attend the workshop that's going to bring you and your business to the next level, or even take you and your crew on a business retreat.
The BIG STUFF (long-term) Savings Account - There is the daily, quarterly, and annual expenses, and then there's the BIG stuff that your business needs but only comes up once a year, every couple years, or even just one-time, ever. This account is meant to fund things like a new computer, a multi-month down payment for a new office/studio, office/studio renovations, a new business venture or segment, outsourcing a BIG job (i.e. building a website, strategic consultant, etc), or saving to hire a(nother) full-time employee. I aim to put 40-50% of my annual profit in this account.
After working with dozens of entrepreneurs on banking strategy, this is the method I have found to work well across the board, but if there is another method that you have found, I want to hear about it! Feel free to comment below with your tips, OR if you want to stay anonymous, e-mail me, and I'll add your tips in the comments using my own name.