Running two bank accounts is an incredibly powerful discipline for a business to adopt because it puts such a focus on making the business make money.
Don’t think of running two bank accounts as a luxury.
Do it as a necessity because it can be so helpful in ensuring you are making money and not just profit.
Where to start with two bank accounts?
Every week set aside in the new bank account as much money as you need in order to make tax payments. It’s simple – VAT is at 20% and Corporation Tax is between 19% – 25%, so if you put aside 40% of all the money that comes in from customers during the week then you will always have enough money to pay these taxes when they fall due.
Of course, you reclaim VAT on purchases and you pay Corporation Tax on profits, not on sales, so maybe 40% is a little high.
Perhaps 25 – 30% of the money collected from customers is a better starting point. Set up a weekly automated transfer or, if you use Starling Bank, you can set up “savings spaces”.
What happens next, pretty obviously, is that the second bank account gradually builds up a decent balance and each quarter when you come to pay VAT and nine months after your year-end when you have to pay Corporation Tax, there’s no panic, you know the money is there.
Ideally there will still be money left over.
But isn’t the main account short of money?
Your main bank account will certainly look to be short of money. But that’s partly the point!
The second very powerful benefit coming from the exercise is that your main bank account should have a lower balance and this should act as a trigger to do something about it.
The target you’re aiming for is that you can comfortably pay your staff, suppliers and the monthly PAYE / NI payment without needing to bring money back in from the second account.
Of course the second account is there as a safety net but you don’t really want to be using it for routine monthly payments.
You can boost the balance of your main bank account through a combination of three things:
- increase your margins and profitability
- improve credit control
- reduce spending until you can afford to spend more – including your own drawings from the business
If you succeed with these measures then you’re on the way to a really sound, profitable, cash-generative business.
And isn’t that what you’re after?
Michael – @bluedotmichael
Related links:
Cashflow and upfront payments – don’t think you’re richer than you are
Don’t bank on your bank for cashflow
