Most of us creatives start a small business because we’re passionate about what we do, and the idea of making money from passion sounds like “the dream”.

But the reality is that you’re only going to spend about 20% of your time actually doing your passion.

The remaining 80% of your time gets spent on admin stuff, including managing your finances, and this is why it is so important to price yourself sustainably and stay on top of your finances.

This is also the scariest, most confronting and overwhelming part of being a business owner, and where a lot of people fall down.

Most businesses fail within the first three years, because most people start a business without doing proper research & business planning, have a lack of support, and don’t know how to properly manage their finances and cash flow.

The good news is that you’re not a failure for not knowing these things! You can 100% learn how to be confident when managing your finances and cashflow, and today I’m going to help unpack my best tips to keeping your business financials and cash flow organised so you too can dance your way through tax time.

Let’s change that for you.

Invoice gets sent, money comes in. Now what?

Truly, I don’t really know anyone in my circle of small-biz friends who is really comfortable managing their finances, or comfortable pricing themselves for sustainability and profit (especially in those early days). It’s confronting to ask people for money, especially because what we do is so personal to us.

If you’ve never had any business experience before, knowing what to charge and even just figuring out how to create and send an invoice can be overwhelming too. Then, once you actually get paid - what do you do with the money?

How much do you put aside for expenses? How much do you take as a wage…..and what about putting aside money for tax?

Get a Separate Bank Account for Your Business.

Okay, so you’ve seen an accountant or bookkeeper, chosen and set up your accounting software of choice and you’re about to receive your first payment WOOOOOHOOOOOO!

But where do you tell your clients to transfer money to?

Whatever you do, don’t deposit business income into your personal account - this is a recipe for disaster.

Why? Keeping business and personal transactions separate makes it easier when you’re using software like Quickbooks or Xero to reconcile your income & expenses. If you’ve got your personal transactions coming in, you’re creating more work for yourself as you’ll have to manually reconcile those as separate personal expenses. If the ATO decides to audit your business, having a separate bank account will make the process smoother. It provides a clear financial trail without personal transactions muddying the waters.

You can open an actual business account using your brand new and shiny ABN, or you can open a separate personal account, it doesn’t really make a huge difference - just as long as it’s a separate account from your personal transactions. When you open a business bank account, the biggest difference is that people will type your business name, rather than your personal name, into the “Account Name” section and you’ll get issued a card with your business name on it.

If you haven’t read it, make sure you read my tips about how to manage your business finances here (managing business finances means how to use Quickbooks or Xero to keep track of your income & expenses; cash flow refers to ways to manage the actual cash in your bank account).

Here’s my go to method for managing my cash flow in my small business(es).

Confession time - I currently have 10 active bank accounts for my business 😅🤓.

Yep! And I love every single one of those babies.

I wasn’t always like this - for the first few years of my business I operated everything out of one bank account.

But it got to the point where money was flying in and out of that account faster than I could keep up with, and holy sheeeet guys, it got real messy towards the end. I was beyond stressed because no matter how hard I worked, I wasn’t saving anything and I genuinely had no idea how much money I was withdrawing as a wage because I was just taking it out in little payments multiple times a week.

One day at the end of 2016 I was scrolling through a thread in a business Facebook group where someone talked about this book called “Profit First” by Mike Michalowicz. It’s basically like the Barefoot Investor, but for business and it.changed.my.life.

It’s hard to believe that just making some small changes to the way I managed my cashflow could have such a huge impact on my business and my life but I have so much more clarity now, I have never again worried about paying my taxes.

It also means that I always have a little pocket of savings in case things go belly up, like they did through COVID-19 when I couldn’t work.

Understanding the “Profit First” Method.

The author of Profit First Mike Michalowicz talks about Parkinson’s Law which says that your work will expand to fill the time you have available. Anyone else ever left a task to the last minute?

He suggests the same thing applies to money - what if your expenses are expanding to use the money made available by your income? You’ll have very little, and likely nothing, left as a profit.

The Profit First Method flips this old school accounting method on it’s head, and instead of using [Income - Expenses = Profit] we use [Income - Profit = Expenses].

Radical, I know.

But the mindset shift from profit last, to profit first, will have a huge ripple effect through every part of your business. Instead of taking leftovers, you are prioritizing profit (and well on your way to building a profitable and sustainable business). It also forces you to reconsider your spending habits to stop you from spending more than you truly have available.

There’s so much more to it, and I 100% recommend that you buy and read through the book (I tore through it in less than a day). If you’ve read The Barefoot Investor, you’ll know that the author recommends you open a variety of bank accounts to help your cash flow, and Profit First follows the same line of thinking (but with a completely different process).

HOW DOES IT WORK?

In order to make Profit First work for you, Michalowicz recommends you open five core bank accounts:

Income account – all your money comes into this account
Profit Account – this account accumulates a small percentage off the top that can be used for debt reduction, and as a bonus for all your hard work.
Tax Account – this account accrues a percentage of your income that you need to meet your GST and Tax obligations
Owner’s Pay Account – the account where you get paid from (don’t reinvest these funds, this is your salary)
Operating Expenses (OPEX) Account – it’s as simple as it sounds, this is the money your business has available to pay it’s expenses.

If you need more accounts to suit your business needs, open them up!

Then, every fortnight you sit down and look at all the money that has collected into your Income account, and you divide it among your accounts according to some percentages (which I’ll cover further down below).

Copy my Profit First setup.

These days I’ve got ten bank accounts for my business (yes, ten – and these are just for my business and don’t include my personal bank accounts, of which I have 5).

There are eight accounts with my main bank, and two savings accounts with another bank account (where the money is harder to access).

Most importantly, I choose to use a bank that won’t charge me bank fees for most of these accounts.

In my main every day bank account I have the following accounts:
ONE Income // this is a digital only account, which receives all incoming payments.
TWO Profit // this is a digital only account, where I transfer my profit.
THREE GST + Tax // a digital only account where I save money to meet my GST & Tax obligations
FOUR Owner’s Pay // a digital account that I add my “wages” to.
FIVE OPEX Savings // OPEX stands for “Operating Expenses”, this is a digital only account where I save money that I can use on general expenses in my business.
SIX OPEX Card 1 – Subscription Expenses // this is an expense account with a card attached to it, that I use solely to pay for my recurring subscriptions. I keep track of how much this is every month, and I have a recurring transaction setup that transfers money from account FIVE to this account.
SEVEN OPEX Card 2 – General Expenses // this is another expense account with a card, that I use for all one-off/random business expenses. I have to transfer money into this account whenever I want to spend it, which helps me combat my ADHD impulsivity & spontaneity.
EIGHT OPEX Card 3 – Prints + Albums Expenses // this is another expense account that I transfer money into to cover the costs of any prints + albums that a client has included into their packages, so I’m never left scrambling for money to pay for them.

With a second bank account, I’ve got two more accounts:
NINE Tax Savings // this is a digital only account. At the end of every quarter, whatever is left over in my GST account is transferred to this account, in case I have to make any additional repayments at tax time. And if I don’t - I treat the money in this account like a tax return, and I take it and add it to our personal savings account.
TEN Profit Savings // this is a digital only account that I use to transfer whatever money is in my Profit Account at the end of every quarter. Over time, this builds up - the goal is to save 3 months worth of net income, so that you’ve got savings to fall back on if business ever dries up (which was my saving grace during COVID lockdowns).

How to figure out your percentages.

Now, you need to determine your percentages and how much you will need to transfer into each bank account from your income account. Mickalowicz recommends you do this twice a month, and has a lot of recommendations on what these percentages look like based on your business income and needs.

The only thing to be aware of is the book is American, and the tax laws are very different here in Australia so I had to tweak his recommended percentages a little bit.

Here’s what mine look like:
ONE - Profit – 5% (every quarter I take 50% of what I generated in that quarter as a bonus for personal use).
TWO - GST + Tax – 10% for GST and 15% for Tax (total 25%). Get an accountant to help you forecast your income for the financial year which will help you determine your personal tax percentage. Mine is now determined by the PAYG system.
THREE - Owner’s Pay – 40%
FOUR - if I’ve had any clients purchase a package with prints or albums, I will calculate my production costs for those items, and transfer that amount to account #8.
FOUR - Operating Expense Savings – the remaining balance.
RECURRING TRANSACTIONS - every month I have an automatic recurring transaction to account #6 that covers my monthly subscriptions.
RANDOM TRANSACTIONS - whenever I need to buy anything in my business, I have to manually transfer money from account #5 to account #7. This helps me keep my ADHD in check, and it forces me to think hard about whether the expense is necessary or not.

Restricting your business expenses to only 30% of your income can be an uncomfortable exercise and it will probably mean that you need to delay some spending, at least in the early days until you have established a rhythm.

The big rule here is that if your OPEX account is empty, you can’t pinch from other accounts to top it up.

Instead, this is a wake up call for you - your business is literally screaming at you that you cannot afford to carry on this way, and your business is not sustainable.

You must cut some expenses somewhere, you can pick them back up again later, but do what you need to make it work.

The majority of my bank accounts are personal online accounts, so I don’t pay any bank fees. And honestly, this might sound complicated but it actually saves me time when I’m reconciling my bank statements in Quickbooks because everything is super clear and purposeful.

PRO TIP → If you want to start Profit First, don’t apply it retroactively. Just start from your next deposit.

Over and Out!

Well that's the lowdown on cash flow!

Remember, while our passion lies in creating, it's essential to sprinkle a bit of financial fairy dust to keep our dreams afloat. If you found this helpful, I’d love to hear from you! Drop me a comment, an email or swing by my Instagram page 😘.

Oki bye!

Elle

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