In the 90s, the late Jim Rohn suggested that an excellent way to manage finances is by controlling the money you have coming in, into several pots (or spaces)
These pots represent the strategic intention of your business and allow you to build up funds for a rainy day. I have extended this a bit further, so let me explain more.
Some of you may be aware that I use Starling Bank *. One of the main attractions for this account is that it invites you to create something called a ‘space’.
Working with Tax Spaces (VAT and Corporation Tax)
My business is Value Added Tax (VAT) registered. This registration means that the amount that we charge for services includes the VAT at the prevailing rate. This tax rate is currently 20%.
For every £100 we invoice, 20% of this (or £16.67) is the tax that at some point we need to repay to the taxman.
Every time we have an invoice paid, we move this amount into a VAT space. This way, when we do the calculations at the end of our accounting quarter, we have the funds there to settle the tax bill immediately.
We also have a corporation tax space. When we are aware of a payment that we make (for example dividends), or are approaching the end of year with free cash, we move money into the corporation tax space.
Working with a savings and reserves space.
10% of the invoice (excluding VAT) is squirrelled away into two pots. A savings space and a reserves space. Think of this as a fund that can settle short term projects and rainy day money. The latter has proved especially useful over the past six months, as I don’t think it has rained as hard as it has due to COVID.
Working with a pension space
10% into a pension space in addition to regular payments. At times when revenue has been tough to generate, the pension is prioritised. For those that can remember the term AVC (additional voluntary contribution), I use this space like this. So, every quarter, I look at this pension space and move into the physical pension.
Working with donations and charity
I also strive to donate 10% of my time or the money generated by that time to a good cause.
Working with a subscriptions space.
I try and take advantage of annual (or longer) subscriptions where possible because of the discount this gives. This also helps to remove pontification – in that once that decision has been made, it doesn’t need to be revisited. Any ongoing subscriptions have a monthly cost, that is also placed into a subscriptions space.
And the rest?
This leaves a balance in the business that I can then run the company with, including my takings, subscriptions, and general everyday operating costs that can be budgeted.
Some may argue that this perhaps is too prudent to run a business and sure, at times, there are internal mind thoughts about utilising allocated cash to other projects. This is a serious conversation that considers the balance of cashflow vs liability.
After all, without liquidity, we cannot run a business.
* this is a referral link for Starling Bank. However, instead of hard cash exchanging hands, Starling Bank will plant a tree for us. That just feels right, doesn’t it?