How many bank accounts do I really need?

| Categories: Business Coaching , Cash Management , Profit First

Blog by Fuel Accountants

Wait What? Am I telling you that you need more than one bank account? Yes, I am!!

Remember how our grandparents did finances? The paycheck got cashed, and the money came home and was put into separate envelopes: Rent, Food, Clothing, etc.

Well, this same idea can be employed in your business. We help our clients set this up into what we call our Profit First Cash Management System (PFCMS). As money comes in, it gets allocated to various business accounts. The point is to have the right amount of cash in the right place, at the right time.

In the basic system we set up 5 bank accounts:

  • Revenue Account: This is where all the revenue goes from your sales.  Be sure to redirect your merchant account, EFT account notices, eTransfer auto-deposit account, etc., to point to this account.  No direct payments should come out of this account.
  • Profit Account: This is where you allocate a percentage of your sales. This is your profit. You deserve to make a profit, and we think you should take it first instead of last.
  • Owners Pay Account: Yes, you actually deserve to get a paycheck for your work in the business, just like the rest of your employees. And this is where you park the money until your payday arrives.
  • Tax Account: This is where you allocate funds to pay your income taxes. That way the money is already there when it comes time to pay up the taxing authorities.
  • Operating Expense Account (OPEX): This is where you allocate the funds that will pay your various operating expenses. This effectively puts you on a budget and sort of forces you to not spend more than what is showing up in this account. 

Ok, so these are the 5 basic accounts you need to implement our PFCMS. We use this in our own business, and we have quite a number of clients that use it in theirs as well.

We use it in 2 different dimensions:

  1. It’s a really great tactical cash management system.
  2. It can also be set up to facilitate achieving the targets in your strategic management system.

So you see, it works both in the short term AND the long term!

But there is more to this (Isn’t there always more?)

All businesses don’t fit into the same mold, right? So we refine the system to work for your specific business. As an example, we might recommend additional accounts such as:

  • Sales Tax Account: This is where you allocate any sales tax collected on sales. Why? That’s not your money. It belongs to the state taxing authorities.
  • Subcontractor Account: When you hire a subcontractor as part of your product delivery process (not admin), you make a promise to pay them for their completed work. When you collect funds from your customer, part of those funds don’t belong to you. They belong to your subcontractor. We’ve seen a number of situations where the business has spent the subcontractor money, and now can’t pay them. 
  • Inventory Replacement Account: If your business has inventory it sells, it must be replenished upon sale. By allocating funds into this account, you are assured the money will be there to buy the inventory when it comes time to do that.
  • Asset Acquisition Account: If you need to replace or acquire new fixed assets, this account establishes a sinking fund to store up the funds for that.
  • Debt Retirement Account: If you have debt you’d like to retire, allocating money to it will do the trick.

When we implement our PFCMS with our clients, we first do financial analysis, and then look at how the business flows. Then we make recommendations of how to set up and maintain your PFCMS.

If this sounds good, give us a call. We LOVE helping make our clients successful…

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