Most service business owners treat their bank accounts as a one-size-fits-all solution. Money goes in, money goes out, and see how well they did at the end of year.
What if there was another way?
What if there was a way you could set up your business bank account so that:
- You would always have money set aside for payroll so you know you can meet it each month with ease.
- You always have money set aside for taxes so you don’t get surprised by a big bill from the IRS each year.
- You get your material costs for each job covered immediately so you don’t have to pay interest or have to sell future work just to pay for past work.
Well, there is a way and it’s actually pretty simple.
The first step is speaking to your bank and getting them to set up sub-accounts within your main business account. Most banks will do this if you ask nicely, but if your bank is the exception you can also open additional accounts if necessary.
Essentially, what you’re doing is designating each sub-account as a bucket responsible for funding a specific business requirement.
For the above examples, you would create a sub-account for payroll, for taxes, and for material expenses, but you could also create sub-accounts for your profit margin, operating expenses, emergency funds, capital expenditures, and more.
With your bank accounts in place, you can then allocate to each bucket exactly the amounts necessary to fund those activities which ensures that you always have the right amounts of money in place and aren’t left scrambling when bills come due.
Once a month, or even once a week, you move the money from the main checking account into the proper buckets.
This kind of bank account system gives you a greater ability to plan for future expenses, to pay off debts, to cover your bills, and to know exactly how much of your revenue is profit.
It also avoids the pitfalls of “bank balance accounting”.
Most service business owners have one main business account where all revenue is dumped into and every expense comes out of.
This isn’t a great way to operate by the way.
When a bill comes due or they’re considering making a purchase, like a new truck, for example, they look at their checking account balance and base the decision on the number they see.
This kind of accounting leads to all sorts of cash flow problems and often results in payments being delayed, or the aforementioned scrambling to close on an invoice to bring in enough revenue to cover past expenses.
Simply having a system of bank accounts that makes things clear on what money is earmarked and what’s available to spend gives you greater clarity on whether your business is healthy or not, and helps you make better decisions over the long haul.
That’s how we operate and one of the ways we help clients run their business. If you want to have a seasoned professional on your team that can help you set up the accounting systems you need to succeed, you can book your consultation right here and we’ll connect with you on how we can work together.