Managing a business’s finances is often a complex task that confounds many entrepreneurs, but it doesn’t have to be. In this article, we will demystify the art of business money management by introducing you to a straightforward yet effective strategy: the 5-Pot Method.
Drawing from the wisdom of Jim Rohn, who urged us to craft a budget and stay faithful to it, this method is aimed at separating revenue into defined categories to ensure a balanced approach to money management. Over the past five years, I have refined this strategy, using it to bolster financial health and navigate through economic uncertainties.
The implementation of the 5-Pot Method is straightforward, especially with a banking partner like Starling. Starling offers a unique feature called “spaces,” similar to digital pots where funds can be allocated. Each month, as revenue flows in, money is designated to these spaces.
1. VAT Space: The Non-Negotiable
As a business owner, VAT payments are an obligation that can’t be avoided. Therefore, this forms our first ‘pot’. Depending on your VAT rate, a set percentage of your earnings – typically 20% – goes into this space. By doing this, you’re always prepared for tax season, avoiding last-minute scrambles to find the necessary funds.
2. Savings Space: The Capital Asset Builder
Next, we set aside 10% of the earnings in the savings pot. The purpose of this space is to accumulate funds for capital investments. Whether you need to invest in a course, upgrade your equipment, or make any other capital purchase, this pot becomes your go-to resource, preventing you from touching your working capital.
3. Reserves: The Rainy Day Fund
Running a business involves navigating through high and low revenue periods. A reserve pot provides a safety net during those challenging times. Again, we put aside 10% of earnings into this space. When you face unexpected expenses or drops in revenue, this reserve can ensure your business stays afloat without plunging into debt.
4. Pension Space: Planning for Tomorrow
While managing present financial needs, we must not overlook our future. So, another 10% of earnings is allocated to the pension pot. Not only does this involve contributing to your pension every month, but it also ensures your pension grows as your company’s earnings increase. If your pension fund dips, this pot can serve as a top-up, ensuring a steady retirement plan.
5. The Main Pot: The Operational Fund
Finally, what remains after all these allocations forms your main pot. This is the fund that you utilize for the daily running costs of your business, including salaries, rent, utilities, and other operational expenses.
Several banks offer similar functionalities to Starling’s “spaces,” so you can implement this strategy irrespective of your banking partner. It’s also advisable to reflect these changes in your accounting software to ensure an accurate representation of your financial status.
Make it a routine to allocate your funds every two weeks or so. By making this a habitual task, you not only stay on top of your finances but also cultivate a disciplined approach to managing your business’s money.
In essence, the 5-Pot Method simplifies the intricate task of business money management. By categorizing your earnings and assigning them specific roles, you can ensure your business is not just surviving, but thriving – financially prepared for whatever the future may bring.