Company finances are complex and time-consuming, no question. From daily transactions to long-term savings and tax obligations, there’s a lot to keep track of.
Just four core bank accounts. Done right they simplify your cash flow management, surface potential problems, and prepare your business for those upcoming financial obligations.
Four Bank Accounts Are All You Need
1. Transaction Account
Your transaction account is your business’ primary account for daily cash movements. This is where you deposit revenue from sales, client payments, and other income sources. It’s also the account you use to pay expenses like rent, utilities, supplier invoices, and salaries.
If you’re a sole trader, keep this account free of your personal spending. It’s crucial for accurate bookkeeping and tax purposes, and it helps you to track your business’ income and expenses without muddying the waters with personal spending.
2. Reserves Account
When your business has excess cash, transfer it to a reserves account. This interest-bearing account earns you money on your surplus funds without losing access to liquidity.
Your reserves serve multiple purposes.
They help cover unexpected expenses like equipment repairs or legal fees, provide a buffer during slow sales periods, or gives you the resources to get a hold of growth opportunities like expanding to a new location or launching a new product line.
Good management practice, for small businesses at least, is to build your reserves so they cover three to six months of operating expenses.
3. Statutory Account
Your statutory account is where you stash the cash you need to pay government taxes, levies, and employee superannuation entitlements.
Many businesses make the mistake of leaving these funds in their main transaction account, only to come up short when it’s time to pay the man.
By setting aside a portion of your revenue into a dedicated statutory account each month, you avoid the stress and financial strain of scrambling to gather funds when these payments are due.
A good rule of thumb is to allocate around 30% of your revenue to this account, but your accountant can fine-tune to match your business structure and obligations.
4. Deposits Account
A deposits account is a must-have if your business accepts deposits or progress payments from clients, or holds warranty obligations. This account holds these funds separately until the work is completed, and you can legitimately claim the money as revenue.
For example, if you’re a custom furniture maker and a client pays a 50% deposit for a dining table, that money should go into your deposits account. Only when you deliver the finished table would you transfer the deposit to your main transaction account as revenue.
By not mixing deposits with your daily operating cash, you maintain clearer records, avoid spending money your business has yet to truly earn, and can easily refund deposits if needed.
The Benefits Are Real
Yes. It’s extra work to manage multiple accounts, but the benefits outweigh the effort:
- You have a clear picture of your business’s financial health by separating daily transactions, savings, tax obligations, and client deposits
- You simplify your bookkeeping and tax preparation by keeping different types of funds organised and easily traceable
- You avoid accidentally spending money allocated for taxes or client deposits, preventing cash flow crises and legal issues
- You earn interest on surplus cash in your reserves account, providing an additional income stream for your business
- You are better prepared for both planned and unplanned expenses, from buying new equipment to handling emergencies.
Ultimately, these four simple accounts give you greater visibility of your business’s finances and help you make more informed decisions about spending, saving, and investing in your company’s growth.
Involve Your Bank and Accountant
Setting up these accounts is straightforward – grab your accountant and meet with your bank’s business banking specialist. They will set up the right account types and features for your needs – online banking, debit cards, transaction limits, and integration with your accounting software.
Your accountant needs to be involved. They advise you on the best way to allocate funds to each account based on your situation, tax obligations, and growth goals. They set up automatic transfers between accounts to simplify money management, and they make sure you’re consistently saving and setting aside funds for taxes and reserves.
This Approach Works
These four key bank accounts work. They are cash buckets, each for a specific purpose, and impart clarity, control, and peace of mind. You are better equipped to make informed financial decisions, survive unexpected challenges, and seize opportunities for growth.
I have worked with businesses that scrambled really hard each quarter.
Some quarters, it’s simply not enough. Next quarter, they start handicapped.
The statutory expenses are the killer. Times are indeed tough, and you don’t have to look far to find examples of businesses forced into liquidation because they can’t pay their tax debt.
It gets worse if you’re the director of your business (a common situation). The current legislation holds directors personally responsible for tax and superannuation payments due, even after the business has been shuttered. You don’t want a Director Penalty Notice, ever.
Don’t believe me? Read this very recent and sobering article.
TL;DR
Don’t risk your house, lifestyle and retirement when you don’t have to. The four accounts approach is simple to implement and maintain. Thank me later.
