We’re going to take a break now from accounting stuff and look at some practical business advice! This one’s for all of you who have just started or are thinking of starting your own business!
Starting your own business is a difficult choice to make – but if you’ve made it, hey, good on you. I’ve built my blog around providing simple, easy to follow accounting and financial education for small business owners. I’ve worked with startups for a good 10+ years now as a facilitator, accountant and business lecturer and over the years and have come to realise some absolutely crucial things that every startup business or side-hustle needs to learn. In this week’s post, I will talk about lesson number one: Your business’ money is your business’ money!
Arguably the most important lesson of all is that any money you put into your business – is for business use only. This means the absolute first thing you MUST do when you start a new business is to set up some bank accounts which you MUST ONLY use for business purposes. This helps to keep your business funds separate from your personal funds and makes preparing your tax return heck of a lot easier. Believe me, your accountant will love you for it!
Let’s put that advice into action! Right now, open up in a new tab and google ‘Zero-fees bank accounts’ and you should get a nice long list of zero-fee bank accounts that you can use in your region. Why zero-fee? Because, why the heck not??
When setting up your business bank accounts, be sure to set-up at least the following two accounts:
An Everyday Cash/Cheque Account
This is 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. Literally for any transaction that relates to the day-to-day operation of your business, you should be using this account! You will want to have a debit card associated with this account and you will want to 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!
A Tax Savings Account
Most banks will have a savings account that offers better interest rates than a regular cash/cheque 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). What you want to do with this account is to put about 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! Business owners are not taxed during their payday (because they don’t have paydays – duh) like salaried workers are and 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! The actual % of income you need to put away into this account should be approximately your country’s corporate tax rate % + 1% to 2% more (to allow for some wiggle room).
Now, if your business is GST/VAT/SST registered, you will want to set up a third account, which is an additional tax savings account – except that you put a % (the % being the % of GST used in your country) of your income in it to pay off your Goods and services taxes when they are due – but this is only applicable if you are paying GST/VAT/SST.
Remember, treat your business as being separate from you. More importantly, keep your business finances separate from your personal finances. The last thing you want to be doing is to swipe business money to pay for your trip to Bali and come back to realise that you don’t have enough cash left to pay your taxes and your suppliers (which is a really great way to go bankrupt).
At this point you might say, ‘But Sam, surely I should be entitled to some of my business money – after all i’ve worked my butt off to make all that money for my business right?’
And you are absolutely correct! You DO deserve money from your business – but there is a smart way to do that, which we will cover in the next lesson: Pay Yourself!