Bank Accounts You Should Have
(For your business and your own personal planning)
It’s amazing the extremes that we have seen with the number of bank accounts people have.
Sometimes it’s usually just the one bank account.
Sometimes, it’s far too many.
This can make it seriously difficult to mentally organise the finances.
This is because people may have chased high rates with different banks in the past, and have ended up with several bank accounts.
Not much use in doing that these days without looking at online or challenger banks.
So apologies in advance if this article comes across as a bit basic.
We know that this may seem like a Business Lesson 101, but trust us when we say it has a huge impact on your ability to plan in other areas.
Hopefully, you may have read our previous article where we covered the importance of having the right amount of cash you need to keep to hand. Having individual bank accounts for each of these reasons makes it much more realistic.
Financial planning is as much about removing barriers to the right behaviours, as it is the technical elements involved.
So how many should you have and why?
We think the magic number is four…
Bank Account #1 – Personal daily account
We start with your current bank account, through which all expenditure should run. The hub for all incoming and outgoing cash, whether business revenue or income. Having an account with all the capabilities to handle a lot of transaction is essential. This goes for your business and personal accounts.
You should not stress about this running low.
Remember to pay yourself first when it comes to your business. All too often we see business owners that don’t do this and take a lump sum of money here and there. Keep doing this and HMRC will be wondering what’s going on!
So pay yourself a ‘salary’ (this could even be dividends) each month, so that you manage day-to-day running costs far easier. This also allows you to plan for the future far easier if your income is a predictable part of business cash flow.
Bank Account #2 – Emergencies
This bank account is your safety net, for when life goes awry.
Again, if you didn’t read the previous article, do so – it will help you arrive at the right number.
The money in this account is to be kept separate.
This is your lifeline – it’s something not to be touched unless you have unexpected difficulties as a business or some personal issues.
Look for an account which allows you to achieve a slightly higher rate of interest. But it’s key that there are no restrictions to access, as this needs to be immediately liquid if necessary.
Bank Account #3 – Growth Fund
If you’re passionate about growing your business (and we hope you are) then ideally, you’ll have thought about next steps.
Where will your business need to spend cash over the next few years?
What does it look like?
Maybe it’ll be a rebrand, additional recruitment costs or new premises?
As revenue comes in and after paying yourself, start by moving cash over to this account to gradually build up funds for these things.
All too often, this doesn’t happen. Funds end up being frittered away on things you don’t really need, before you know it!
This can apply to your personal growth /spending too.
Holidays, redecorating the kitchen or getting a new car… all things that you anticipate needing to fund in the short term (the next one-three years).
Again, we’ve all seen money evaporate from our current account, without knowing for sure where it really went! So if you ring-fence your funds in your ‘growth account’, you won’t be frittering them away.
Bank Account #4 – Tax
Love it or loathe it, we all have to pay it.
As a business owner, you are likely to need to account for tax in the future. This could be corporation tax on business profits, or a self-assessment if you run a partnership or are a sole trader.
As a business owner, understanding cash flow is essential and as part of this, you should be keeping a record of your profit and loss for the business year.
By doing this, you can credit or debit your tax account where appropriate, then have this there to meet your tax liabilities, rather than it being a bit of surprise and having to fund it using the current account.
This is the last thing you want if having shorter-term cash flow problems, or if you were looking at methods to generate growth.
Obviously, this applies personally as business owners tend to need to account for personal tax arising from self-assessment. You will likely be paying on account which somewhat manages this, but equally, unless your income (salary, dividends etc.) is completely stable every year, there is still potentially more to set aside. Monitor this and set aside the tax you are likely to need to pay. This way you know what you can spend on day to day costs and those ‘growth’ activities.
There may be even more subtle differences to the way you ‘mentally account’ for your incomings and outgoings.
But these four bank accounts can drip down into you growing your business and organising your personal planning.
So although it may seem a bit boring, give it the time it deserves!