(bank account – 5 minute read)
Are you a business owner? Or maybe you are a freelancer, looking for some self-employed work (which still counts as a ‘business’). Are you using separate business accounts for your business?
If you are, great! If you’re not, then you should setup some new bank accounts specifically for your business/freelancing work.
Multiple bank accounts are a great tool to use in personal budgeting. We can apply the same ideas to business budgeting as well. Having money in different accounts earmarks them for different purposes. There are a lot of different ways to setup bank accounts for your business, but here are the four basic bank accounts that every new business should have at the very start of their business.
A Daily Business Account
This is your main business account. The account you use to pay for business expenses. This is also the account you get your customers to pay into for your products/services. Some advisers may ask you to have a separate account for expenses and income – but this is clunky. Save yourself the pain of having to transfer funds over to your spending account to spend and just do it all in one account.
Any transaction that relates to the day-to-day operation of your business, should be using this account!
Paying Rent? Daily Business.
Staff Wages? Daily Business.
Income from Customers? Daily Business.
This is the account number that you put on your invoices you send out to clients. If you are using online payment services, this is the account you get paid into. This account should be opened as a regular checking account.
You will want to have a debit card associated with this account. You can use this debit card to make online purchases and EFTPOS payments. Make sure that you plaster a giant ‘BUSINESS USE ONLY’ sticker over that card so that you won’t be tempted to use it to buy personal stuff! If you are looking to pay yourself, you can take drawings out of this account as well.
An Income Tax bank account:
Most banks will have a savings account that offers better interest rates than a regular checking account. Typically to qualify for this interest, you need to be depositing a certain amount of money and not withdraw any money for a period of time (typically for at least a month or so).
You need to put aside 20% to 30% of any income received into this account. This is money which you are setting aside to eventually pay taxes when they are due! Ideally you should be doing this everytime you get paid. If your customer payments are irregular, make it a habit to check your income every week and put aside 20% to 30% of that amount.
Most banks will have a savings account that offers better interest rates than a regular checking account. Typically to qualify for this interest, you need to be depositing a certain amount of money and not withdraw any money for a period of time (typically for at least a month or so).
You need to put aside 20% to 30% of any income received into this account. This is money which you are setting aside to eventually pay taxes when they are due! Ideally you should be doing this everytime you get paid. If your customer payments are irregular, make it a habit to check your income every week and put aside 20% to 30% of that amount.
Business owners don’t have tax deductions like salaried workers. Because of this, business owners who don’t put money away to pay taxes when they are due often find that they have no cash to pay taxes! Taxes are important! Your ability to pay taxes on time can make or break your business. Make sure you start off on the right foot with a dedicated bank account to put money away for taxes.
If you are paying provisional tax, the rule still remains the same – 20 to 30% of your income should still go towards your income tax account.
A GST bank Account
If you are not GST registered, you don’t have to set one up.
In NZ, the GST rate is 15% – so everytime you receive a payment from a customer, be sure to put 15% away in your GST savings account! Remember to not put away 15% of the payment received, but 15% of the gross amount charged to your customer.
Here’s how it works:
Wong makes a sale of $1,000 to his customer. With 15% GST, he sends his client a bill of $1,150 ($1,000 sales plus $150 GST). When he receives money from his client, he will get $1,150 into his bank account. He then should put $150 into his GST account from the sale.
You can make the calculation simpler using this formula. Whatever your clients pay you, is inclusive of GST (if you are GST registered). Simply take the GST inclusive amount and multiply it by 3 and divide it by 23:
$1,150 X 3/23 = $150
And that’s the amount you must be putting into the GST account. Remember that GST is borne by your consumers, not you, but you are simply responsible for collecting it from them. When it is time to pay GST, you can be sure that there is enough money in the GST account to make the payment!
A ‘fuel for growth’ bank account
In some of my older writings, I used to call this a ‘war chest’ account. Given the ongoing conflicts around the world, I have opted for a less militaristic sounding term. A client of mine used ‘fuel for growth’ for this account and I shall adopt it too.
The purpose of the Fuel for Growth account is to have fuel (money) to grow your business in the near future. The way this works is that at the end of each week, 10% of the remaining balance in your Daily Business Account should go into your fuel for growth.
Fuel for Growth.
Money saved in Fuel for Growth for spending on large, one-off expenses. You can use this money to pay for some specialist training, buying a new vehicle for the business or putting a down payment on some plant and machinery. Money in this account can also be used to make emergency payments – like a large client refund or a contract dispute settlement.
A simple strategy to simplify your finances
These are some simple, basic strategies that you can use to get your business finances on the right foot. As your business grows, you may find that you need to refine these strategies with other tools, like accounting software and financial tracking. The main purpose of having different bank accounts is:
- Putting money away for taxes
- Saving money up for future growth/emergencies
- Making sure you have enough money to run the business
With the money in the right accounts, you will feel more confident about your finances. Plus with this basic system setup, you can then work on strategies on how to pay yourself from your business. Which we’ll talk about in a different article!
Stay on top of your finances and stay financially confident!