In my previous article, I shared some of the conversation I had with my friend David Richter, author of Profit First for Real Estate Investing. I shared his idea that the one mistake costing real estate investors and business owners their sleep, sanity, time and money is…running their business (or life) with only one bank account! There is, however, a better way.
There are two parts to fixing the mistake of having only one account:
- Bank Balance Accounting – Many business owners operate their businesses and make financial decisions based on looking at what their bank balance is, as we discussed in the last email. Most business owners probably look at their smartphone banking apps 10 times more than they look at their P&Ls and Balance Sheets. Leverage what you are already doing, and fully utilize the habits and resources you already have in place.
- Modernized Envelope System – If you, like me, are a fan of Dave Ramsey, you are probably familiar with the envelope system. This is a way to control and track your spending by putting cash into envelopes labeled for the various categories in your budget, such as groceries, clothing, entertainment, etc. You can quickly see how much you have to spend on those things. If you spend all the money in an envelope, then you can’t spend any more money on that category until payday when it’s time to put more money into that envelope. The modernized envelope system relative to your business is the process of opening multiple bank accounts and giving them specific names so that every dollar that comes into your business has a designated home and specific purpose.
So, what are these accounts and how are they used? If you want to have control of your cashflow and business, you need to open four new bank accounts, one for each of the following purposes:
- Owner's Pay
- Owner's Tax
The single account you currently have will no longer be your “cash salad” account where all your money is thrown in and mixed together. It will now be the “Operating Expenses” account from which you pay your business bills and employees.
In my final article on this topic, I’ll share how your money will flow into and out of these accounts. If you are interested in learning more about this concept for transforming your business finances, you can get David’s book on Amazon.