How many business bank accounts do you have on the go? Do you have one giant financial pot where everything enters and exits from? Or do you opt for multiple accounts dedicated to various business functions?
Does it even matter as long as the bills get paid every month?
According to many financial experts, having various bank accounts can make a huge difference – not only to the success of your business, but also to your money mindset as a solopreneur.
If you like the idea of fine-tuning your financial management and boosting your profits, this blog is for you. Keep reading to find out the magic number of accounts, and how it all works.
How Many Business Bank Accounts Should A Solopreneur Have?
Adopting A Profit First Mindset
Before we get to the numbers side of it, let’s dive into the reasoning behind the multiple bank account approach. For many business owners, this process involves quite a mental shift to a profit first mindset.
Many people approach their business profits in the same way, using this simple equation:
Sales – Expenses = Profits
Money comes in, they use it to pay their bills, and whatever is left over becomes the profit.
The profit first system reverses this equation:
Sales – Profit = Expenses
The idea is that when we have a large pool of money “available” for our expenses, we use what’s available, which doesn’t leave much room for profits (or paying yourself).
However, when we limit the amount of money available for expenses, we find a way to do the same thing for less.
How To Flip Your Mindset
Think of it this way. When you have a new bottle of shampoo, you are likely to use a generous dollop every time you wash your hair – probably more than you need.
But let’s say the bottle has nearly run out and you are not due to do a supermarket shop for another week. You use smaller amounts to get you through until the next bottle. Your hair is still clean, but you have been more careful about how much shampoo you use.
This is how it works with your money.
Suppose you define precisely how much you need to cover your expenses every month and divide it into the appropriate accounts. In that case, you are more likely to stick to the budget and get your desired profit at the end of the month without allowing extra expenses to eat away at it.
You are prioritising your profits and managing your expenditure carefully.
How Many Business Bank Accounts Do You Need?
To effectively utilise the profit first method for your business, it’s recommended to break your finances down into five key accounts:
Your income account – this is the pot all your income pours into.
Your profit account – pre-determine the amount of profit you can reasonably commit to every month (e.g. 5%) and allocate it to this account.
Your owner’s compensation/wages account – this ensures you get paid (many business owners forget about this part!). It can be separate from – or a part of – your general wages account if you have employees.
Your tax account – money is put aside towards your tax obligations every week, so you can easily cover your tax bill at EOFY.
Your operating expenses account – all your outgoings for your business are covered here.
Allocating Funds In Your Business Bank Accounts
So, how much of your income should you allocate to each of your business bank accounts?
Every business will have different figures, but you can calculate the percentages required for each area and divide your income by these percentages to deposit into the four relevant accounts.
A standard split that many business adopt is:
- 5% for profits
- 30% for tax and GST
- 30% for owner wages
- 35% overheads and expenses
Keep in mind that this split may not work for your business. You can tweak the percentages to ensure you have the correct amount in each pot.
Of course, you can further separate your finances into as many accounts as you like, as long as you don’t find it overwhelming. For example, it may be a good idea to have a dedicated emergency savings account as part of your financial backup plan.
Why Profit First?
The profit first system is a simple way to set money aside before you need it, keeping your cash flowing and ensuring your profits don’t get eaten up by your expenses. Separating your money into multiple bank accounts gets you into the saving habit and makes budgeting a breeze.
If you like the idea of being more organised but lack the time or experience to make it happen, our team of bookkeepers and virtual assistants can step in and help you get it done. Contact us today to find out more.