I know, I know. Money is not everyone's favourite subject. In fact I can see you rolling your eyes now. Your palms are sweaty. Your heart is beating a little bit faster. Squeeeeee......
But believe me, in the early days of setting up your small business, getting a few basics covered off will prove invaluable!
So, here are my top 5 tips for managing your cash flow in the early days of your business:
- Set up a bank account that is solely, and only, dedicated to holding the cash you have for your business. I think ING is the best option – there's no fancy fees and you get the $2 admin charge back when you take money out of any ATM in Australia (*this does assume you deposit more than $1000 per month into the account).
- for all of our UK, NZ and Canadian followers, there is bound to be a similar bank account / low fee / no fee structure – do a little Google search and see what pops up
- When you get paid by your clients, or you weekly shop revenue is deposited into your account, be sure to set aside up to 25% to account for income tax. I know, at the beginning this is a lot of money but if you can get into the habit of doing this now, you will be forever grateful when you're earning $120,000 a year. Income tax isn't payable until you are earning a specific amount and it varies depending on your income tax 'bracket' but you can check out those details here. The best way to coordinate this is to have a second 'savings' bank account that you transfer the money into. It's best to pretend this money isn't there until after your annual tax return is done. Just don't touch it. Ever. When your tax return is complete and there is extra $$$ sitting in there from the previous year's income, then you can go buy yourself something pretty, go on a little weekend getaway or buy a fancy bottle of wine.
- Register for GST. In Australia, business don't need to pay GST until they are earning $75,000 but in my mind, I'd suggest setting up good cash flow practices from the beginning. Do it now and set yourself up for success before the tax office comes calling asking for previously-owed GST once you pass that $75,000 mark.
- Registering for GST means you need to allocate additional money to your 'tax' savings. So get in the habit of setting aside another 5-10% to account for the GST you will owe the government (at the end of the year or each quarter). The amount you owe the government will vary from quarter to quarter as it depends on how much business stuff you buy and how much business you bill. In it's simplest form though the maths is as follows: (a) when you buy a business thing you pay GST on that (b) when you charge a client for a thing, you charge GST on that. The difference between (b) and (a) is what you will need to pay the government. Start doing this now so that when you're making the big bucks you're already in the habit of pro-actively planning for it.
- When you feel like your bookkeeping has turned into a weekly burden, link your business bank account to your online accounting software. For the first few years of my business I was just using an excel spreadsheet – and that worked just fine for me and my accountant. And then things got busy. I use Xero but I know others use Quickbooks, MYOB and Freshbooks. The reason I have them linked now is that every time I spend $$ from our business bank account a new line item (technically called a journal entry) is created in Xero. Once a week I then reconcile each entry against my receipts and assign them to various pools of money (cost of goods sold, travel, insurance, motor vehicle expenses etc.). This saves me and my accountant a massive headache at the end of each quarter / end of the year.
If you can get into the habit of doing these five things from the early stages of your business you will be in such a better place when your business income grows year upon year. Set yourself up for success now and you'll save yourself so much pain in the future.