Running two bank accounts puts a massive focus on cashflow and making more money.
It’s not always easy.
But it shines an objective light on profit improvement and should mean you always have the money put to one side to make those chunky payments such as VAT, rent, PAYE, corporation tax, bonuses and dividends.
More money in the bank and less stress. What’s not to like?
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’ll 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”.
Over time 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 have less money in it. 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.
Actions to improve cashflow
You can boost the balance of your main bank account through a combination of three things:
- Increase your margins and profitability
- Improve credit control
- Ask your clients to pay by direct debit
- 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?
Can Blue Dot Consulting help you with cashflow?
There are several ways we help businesses with cashflow.
- Encourage them to have two bank accounts and help them hold their nerve along the way
- Build and maintain a cashflow model that looks backwards as well as forwards so it’s anchored in the real world and shows the road ahead
- Make sure their bookkeeping is complete, accurate and up to date. None of this works well without good bookkeeping
- Profit improvement
Can we help you?
Call Michael Austin on 020 7125 0270 or email info@bluedotconsulting.co.uk and let’s arrange a free, confidential meeting to discuss your business and the steps you could take to get on top of cashflow.
Michael
FAQs and related links
How do I get started?
In your online banking simply programme a weekly payment of, say, £500 to get started. Over time you can adjust the value of the weekly payment.
Can I bring the money back if I need to?
Yes you can. But try not to. Two bank accounts really is a no-pain-no-gain initiative but the gains are so worthwhile.
How easy is it to implement some of the other cashflow improvement ideas?
There may be some tough conversations with customers and suppliers but provided you’re able to make changes you’ll soon start to see improvements in your financial performance and hopefully stress levels will reduce.
Related links:
Cashflow and upfront payments – don’t think you’re richer than you are
Don’t bank on your bank for cashflow
