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.
Try not to regard running two bank accounts as a luxury, do it as a necessity because it can be so helpful as an aid to ensuring you are making money and not just profit.
Where to start
Start by putting as much money into the new bank account as you need in order to make tax payments. It's simple - VAT and Corporation Tax are 20% and so if you put aside 40% of all the money that comes in from customers 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.
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 only usefully boost the balance of your main bank account through a combination of three things:
- increase your profits
- improve credit control
- stop spending so much money until you can afford to
If you succeed with these measures then you will have a really sound, profitable, cash-generative business.
And isn't that what you're after?
Think what you can do with all that money!
We see the two bank accounts approach working successfully in a number of businesses, but what about yours?
It would be interesting to hear about the tools that other companies use to not only keep their heads above water but to ensure their cash balances continue to grow.
Why not leave a comment below and let us know?
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