As a business owner, managing your finances effectively is crucial to ensure the sustainability and growth of your business. One of the best strategies to achieve this is through a well-thought-out business income allocation plan. This guide will help you understand how to allocate your business income wisely and set up appropriate bank accounts to streamline your financial management.
Recommended Business Income Allocation
Allocating your business income into different categories helps you cover expenses, save for the future, and invest in growth opportunities. Here’s a recommended framework:
1. Operating Expenses (50-60%)
- Rent/Mortgage: Covering office or facility costs.
- Utilities: Including electricity, water, internet, etc.
- Payroll: Salaries, wages, and benefits for employees.
- Office Supplies: Stationery, equipment, and other necessary supplies.
- Professional Services: Accounting, legal, and consulting fees.
- Insurance: Business insurance, liability, and workers’ compensation. Get more insights on business insurance from Forbes.
- Marketing and Advertising: Costs for promoting your business. Consider our Equipment Financing to manage these costs effectively.
2. Owner’s Compensation (10-20%)
- Ensure a reasonable salary for the business owner(s) to cover personal expenses.
3. Taxes (15-25%)
- Income Tax: Set aside funds to cover federal, state, and local taxes. Refer to the IRS website for detailed tax information.
- Sales Tax: Funds collected from sales that need to be paid to tax authorities.
- Other Taxes: Property tax, self-employment tax, etc. Our SBA Loans can help manage these obligations.
4. Savings and Investments (10-20%)
- Emergency Fund: To cover unexpected expenses or downturns.
- Growth Fund: For future investments in the business, such as new equipment, expansion, or research and development. Explore business investment tips on NerdWallet.
- Retirement Fund: Contributions to retirement accounts for the owner and employees.
5. Debt Repayment (5-10%)
- Regular payments towards any business loans or credit lines. Check out our Term Loan options to simplify debt management.
6. Reinvestment in the Business (5-15%)
- Training and Development: Courses, workshops, and seminars for employees.
- Technology Upgrades: New software, hardware, and other technological improvements.
- Product Development: Research and development for new products or services. Our Invoice Factoring can provide the needed cash flow for these initiatives. Learn about product development strategies on Entrepreneur.
Recommended Business Bank Accounts
To manage your business income allocation effectively, consider setting up separate bank accounts for different categories. This can help you stay organized and ensure funds are used for their intended purposes.
1. Primary Operating Account
- Purpose: Main account where all business income is deposited and from which most operating expenses are paid.
- Uses: Rent, utilities, payroll, office supplies, insurance, and other day-to-day expenses.
2. Owner’s Compensation Account
- Purpose: Separate account for the owner’s salary.
- Uses: Transfers a predetermined amount regularly to the owner’s personal account.
3. Tax Account
- Purpose: Set aside funds specifically for tax obligations.
- Uses: Federal, state, and local income taxes, sales tax, and any other tax-related expenses.
- Benefit: Ensures that tax money is available when needed and helps avoid spending it on other expenses.
4. Savings and Investment Account
- Purpose: Accumulate funds for emergency savings, future investments, and retirement contributions.
- Uses: Building an emergency fund, setting aside money for growth opportunities, and contributing to retirement plans.
- Benefit: Keeps savings separate from operational funds, making it easier to save consistently.
5. Debt Repayment Account
- Purpose: Manage funds allocated for paying down business debt.
- Uses: Loan payments, credit card balances, and other forms of debt.
- Benefit: Ensures that debt repayment is prioritized and funds are not diverted to other expenses.
6. Reinvestment Account
- Purpose: Fund business improvements and development projects.
- Uses: Technology upgrades, training, and product development.
- Benefit: Keeps reinvestment funds distinct, ensuring they are available for growth initiatives.
Simplified Approach
If managing multiple accounts is too cumbersome, consider a simplified approach:
- Primary Operating Account: Consolidate all operating expenses, owner’s compensation, and reinvestment funds.
- Tax Account: Separate account solely for tax obligations.
- Savings and Investment Account: Separate account for emergency savings, investments, and debt repayment.
Effective Management Tips
- Regular Transfers: Schedule regular transfers to each account based on your income allocation percentages.
- Automated Payments: Set up automated payments for recurring expenses, debt repayment, and tax deposits.
- Review and Adjust: Regularly review your allocations and account balances to ensure they align with your financial goals and business needs.
Example Allocation Process
- Income Received: $100,000
- Operating Expenses: Transfer 50% ($50,000) to the Primary Operating Account.
- Owner’s Compensation: Transfer 15% ($15,000) to the Owner’s Compensation Account.
- Taxes: Transfer 20% ($20,000) to the Tax Account.
- Savings and Investments: Transfer 10% ($10,000) to the Savings and Investment Account.
- Debt Repayment: Transfer 5% ($5,000) to the Debt Repayment Account.
Be sure to check out The Ultimate Guide to Setting Up Your Finances for Your Startup to get your financial footing going in the right direction from the beginning.
By maintaining separate accounts, you can more easily track your financial progress, ensure funds are available for specific purposes, and reduce the risk of overspending. Implementing this strategy will help you manage your business finances more effectively, ensuring long-term success and stability.
Utilizing accounting software like QuickBooks Online can help you keep track of your finances. And this QuickBooks Online Guide from Amazon can be your lifeline to transforming the financial management of your startup, allowing you to focus on what truly matters: product development and market expansion.
