Trouble Managing Business Cash Flow? Try Using This 4-Account System. Small-business owners often oversee every aspect of their company, including finance. This simple method helps provide real clarity, making a complicated subject that much easier to manage.
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No matter how noble your business mission is, the nature of business means that you're always going to be dealing with cash flow. Most small businesses have a checking account that can receive income and payout invoices, for instance, and you probably use some type of accounting software, too.
But when you just have one account, things can get confusing. Should your emergency fund really be in the same account you pay employees with, for instance? And the problem with most accounting software is that it allows you to view what happened in the past, not what the current state of the business is. You need a different way of viewing and managing your funds to operate well.
Related: Starting a Small Business? Welcome to Financial Management 101.
A better budgeting and tracking solution
To be successful with handling your business financials, you should have four basic accounts.
- Payables account. A checking account for payroll and all outgoing funds.
- Rainy day account. A savings account for emergencies or times when your receivables aren't as strong.
- Profit savings account. An account that can hold the money left over after covering all of your fixed expenses and payroll.
Income account. Can be either a checking or savings account. All receivables, ACH and merchant services are linked to this account.
Once your business is established, it's easy to sweep funds between accounts, especially from the income account to the payables account. The payables account should have overdraft protection or a good cushion built up.
How to use the four-account system in the real world
The four-account method works like this:
You receive funds in your income account. Each week or month, you take all funds received and automatically sweep 5 to 10 percent (or whatever percentage you're comfortable with) into the rainy day account. For example, let's say your company brought in $50,000 this month and assume you chose to set aside 10 percent. You'd sweep $5,000 into the rainy day account.
Remember, your rainy-day account is an untouchable account. You can't touch the funds in the account unless you've got an emergency (e.g., your water pipe breaks and you need to get it fixed, there was a power surge and your server just went out). It is meant to be used only when there's a serious, critical need, or if you have sufficient funds, to buy new equipment with cash at the end of the year.
So, now you're left with $45,000. By viewing your accounting software and payroll account, and by speaking with your CPA, you can estimate payroll costs. Include the base salary and all applicable taxes, such as FICA and state taxes. Sweep that amount of funds from the income account into the payables account on your set, fixed schedule. You can estimate other fixed expenses (e.g., utilities, loans) by looking through your accounting software and check history. Sweep those in, too.
Anything left over goes into your profit account. At the end of the year, you can use the profit account to pay down debt. If you don't have any debt, use the money to buy equipment, make upgrades or reinvest in the company. Try not to tap the rainy day account for these activities unless you really have to.
It might seem challenging or like a hassle at first to do accounting this way. But when you have all four of these accounts and you use them together continuously for several months, you can easily view and track both receivables and payables in real-time.
Related: 3 Financial Steps Small-Business Owners Should Take Right Now
With four accounts, you have a real-time view of the financial health of your business
So many times, business owners will have their CPA say that their company had a profit. The common statement after that is, "But where is it?" or "I don't actually have the money." Having four accounts solves this problem by giving you an actual view of the financial reality of your business that is simple and understandable. It gives you confidence by letting you see at any time that you're actively managing your money and running your business efficiently. You can make decisions like whether to add staff or upgrade based on facts — no more decision-making based on emotion or what other people are doing or saying.
And remember, as a small business owner, money is especially precious. You don't want to spend it all and get into a position where you can't survive the unexpected or adapt to the market. Let yourself see where the money is and where it's going. That's really what will keep you in the driver's seat and give you and your company financial peace of mind.
