The 4 Banks Accounts You Should Have For Your Business And Your Personal Planning

Phil Hendry06/05/2021

It’s amazing the extremes that can be seen with the number of bank accounts people have. There is usually only one, which makes it seriously difficult to mentally organise your finances, or far too many, where people may have chased rates at different banks in the past….there’s obviously very little point in that these days without looking at challenger banks / online deposit takers.

I know this seems like the absolute basics of planning, but trust me when I say it has a huge impact on your appetite and ability to plan in other areas.

You may have read our previous article 4 Crucial Reasons to Ensure Your Business and Family Retain the Right Amount of Cash, covering the importance of arriving at what the right number is for the amount of cash you need to keep to hand. Having individual bank accounts to support each of these reasons, makes it a significantly cleaner and more realistic exercise. 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?

Account Number 1 – Day to Day Income and Outgoings:

This is essentially your current account, through which all expenditure should run, and essentially the hub for all incoming cash, whether business revenue or income.
Having an account with all the capabilities to handle a lot of transaction is essential obviously. 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 business owners don’t do this and take lumps of money here and there. Pay yourself a ‘salary’ (although this could be dividends etc.) each month, so you can manage day to day 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.

Account Number 2 – Your Emergency Fund:

This account is your safety net. Again, read my previous article to help you arrive at the right number. This being separated out clearly defines it as something to not touch unless you have unexpected difficulties as a business or personally.

You may be able to achieve a slightly higher rate of interest, but it is key there is no restriction in access, as this needs to be immediately liquid if necessary.

Account Number 3 – Growth Fund:

If you are deliberate about your business growth, which I hope you are, ideally you have thought through where your business will need to spend cash over the next few years, whether that is rebranding, recruitment costs, premises….whatever that may look like. As revenue comes in, ensure (after paying yourself that is), you move funds over to this account to gradually build up funds for these things. All too often this doesn’t happen and funds can be frittered away on things they shouldn’t have.

This obviously can apply to your personal growth /spending. Think things like holidays, a new kitchen, school fees…basically things you anticipate needing to fund in the short term (1-3 years). Again, we all know how money can evaporate from our current account, without really being sure where it went! If you ring-fence your funds in your ‘growth account’, you are not frittering them away.

Account Number 4 – Tax:

As a business owner, you are likely to need to account for tax in the future, whether that is corporation tax on business profits, or self-assessment if you run a partnership or are a sole trader.

As a business, understanding cash flow is essential, as part of this, you should be keeping a good grasp of your ongoing profit and loss for your business year. By doing this, you can credit or debit your tax account appropriately, 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 nuances to the way you ‘mentally account’ for your incomings and outgoings, but we think these four accounts feed down into all other areas of growing your business and organising your personal planning. So although it may be a bit boring, giving it the time it deserves!