My quarterly sales tax bill is what finally made me realize that I needed a business savings account in addition to my business checking account. The great news about working hard and growing your business is that you are creating more revenue, the bad news is that revenue creates a much larger tax bill that can take you by surprise if you aren’t expecting it. I have already written a series on the greedy tax monster, but I wanted to write this post to help people make a plan for managing the cash flow of their business. All too often people treat cash flow as an afterthought after ending up in a tight spot.
One of the first things that you should do BEFORE you start collecting money from clients is to open up a business checking account, as well as register to collect sales tax.
All expenses and income should go through the business account or on a business credit card (which you should be paying off every month!). The business credit card can be a personal card or a business card, the important thing is that it is used ONLY for business-related expenses. If you are ever audited, and it seems that if you are in business long enough you will be, it will make your life exactly 5,000 times easier if your credit card statement doesn’t have groceries interspersed with lab fees.
Your business savings account is important not only once you start bringing in more revenue, but I would argue that it is just as important when you aren’t bringing in lots of revenue yet as you will have less of a cash cushion in your account should you have a larger than expected bill. The savings account is a great place to move the sales tax collected so that you don’t accidentally spend it before you need to turn it over to the state.
For instance, October-December sales tax is due on January 20th. We know that the last quarter of the year is one of our best quarters so you collected lots of sales tax! You are in the last week of the year and looking to make a few capital purchases such as a new computer or new lens to bring your tax bill down. After spending 4K in the last week of the year you sit down on January 10th to file your sales and use tax bill and are shocked that it’s over $2,000. Then you look at your business checking and you are going to wipe it out just to pay that bill, or worse, you don’t have enough cash in the account to pay that bill. By moving the sales tax that you collect in your business weekly, bi-weekly or even monthly into a savings account you will avoid that problem!
On that same note, I highly recommend setting a weekly day and time in which you put all of your expenses and sales into your financial software. It’s so easy to spend money on credit cards with quick internet purchases and you can easily find yourself in the same situation as above when your credit card bill comes in the mail.
Cash flow is incredibly important for any business, so please make a few minutes a week to give it the attention it deserves.
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