Many entrepreneurs start their businesses by bootstrapping and/or taking out loans, and while I’m not here to lecture you on that right now, I am here to help you organize your small business bank accounts so you know you can be profitable from Day 1.
Start by creating five different bank accounts. Yes, five. They should all be with the same bank so you can easily transfer between them. Name them the following names in your online banking system so you can easily transfer between them:
Most credit unions will allow you to open numerous bank accounts for free, and many even pay you interest on checking account balances, so go hit up your local credit union and get this started ASAP.
Assign a Percentage
You should now look back at your books (and this is the best time of year to do that). How much does it cost for you to produce your products or services? What’s the percentage of each invoice? Talk to your accountant and ask how much you should reserve for taxes- then assign that percentage to the account and add it to the name of that account.
For example, if your accountant recommends that you withhold or save 30% of your income for tax purposes your tax account name should now be: Taxes 30%. If it costs an average of 10% of each invoice for you to operate your business or buy the products you need to send to clients, your Expenses account should now be named Expenses 10%.
Do this for each of your accounts (not including income) so that the total of all of the percentages is 100%.
How to Distribute Those Percentages
Now, set up your income account to be the account where you receive all invoices. This means when someone pays their invoice it’ll go straight into this account, but hold on, it won’t stay there for long.
For every dollar you get in the income account you will distribute that to the other accounts based on the percentage you assign them.
Let’s pretend for this example we’ve assigned the following percentages to these accounts:
Taxes – 30%
Expenses – 10%
Profit – 3%
Owner’s Compensation – 57%
When an invoice is paid and the money is in your income account you should now be able to distribute it easily to all of the others. Let’s say you have a balance of $1,000 in your income account, you’ll then distribute the funds as follows:
$300 to Taxes
$100 to Expenses
$30 to Profit
$570 to Owner’s Compensation
This should leave $0 in your income account, but it will allow you to:
1.Pay yourself immediately
2. Have a small profit to distribute to shareholders
3. Have a reserve for expenses, and
4. Be prepared when tax season comes around
Doing this exercise will also help in other ways beside organization and making sure your accountant loves you: it’ll test whether you’re charging enough. Most people don’t factor in domain names, server costs, printer ink, and profit into their prices, so they significantly undersell and undervalue themselves. I’m on a mission to change that by helping you set yourself up to be profitable from Day 1, and if you find that’s not working, you need to reevaluate your business model or price. For help, sign up for a free coaching call with me here.
C0-Founder / Chief Happiness Officer
A recovering lawyer and trained happiness in the workplace coach, Sarah is Flauk’s resident business ma’am and money strategist.