I am a big proponent of set and forget banking (as I call it) for managing cash flow. Usually it’s for saving money, saving for tax, or paying off debt, but it can also be used for household expenses. It can save a huge amount of stress when it comes time to find the money if things are quite tight (which they are for a lot of people). A little bit often adds up to a lot, but often you won’t really miss it from your bank account each week.
I’ve done this myself for various things; music lessons and sports fees for my kids, electricity, rent, and tax savings to name a few. Each of these expenses I budget for on a weekly basis and accrue funds in separate bank accounts which I have set up for each of these expenses. Each week the transfers happen automatically on the same day I pay myself, so I never even see the money. I’m never tempted to spend it because I don’t see it so I am never reminded that it’s there. Until the bill for my son’s music lesson comes in and then I know I am able to pay it right away.
Same goes for things like saving for the winter ski season. Work out how much a season of skiing is likely to cost , divide by 52 weeks, or 12 months, and set up an automatic payment from your everyday transactions bank account to a specific account created just for skiing.
Has your credit card balance got a little out of control to the point that you can’t pay it off every month? Finding that stressful? Set up a weekly or monthly automatic payment based on a budget of what you can afford and forget about it. I should point out that it would, of course, probably be useful to stop using the card at this point and revert to paying cash or EFTPOS for something, and additionally revisit your budget to ensure that you are living within your means.
When it comes to your business have you got a separate bank account or two for your tax savings? You get your Income Tax and Provisional Tax schedule ahead of when it’s due so you know how much is to be paid by when. Don’t leave it until the last minute and hope the money will be there. Work out how much it equates to on a weekly or monthly basis, make sure to check the various due dates to make sure that you’ll have enough in the account each time it’s due, set up an automatic payment to a separate savings account and set up the bill payment to pay the tax from that account when it’s due. Set and forget.
Alternatively, not so much a set and forget, because it requires a certain level of discipline on a monthly basis, but still a great idea to ensure you have money for your tax bill when it’s due, is to put aside a certain amount of your net profit each month – say 30-35% (ask your accountant what this percentage should be as it will vary from person to person based on your circumstances). Run your Profit and Loss report at the end of each month once you’re sure everything has been entered and accounted for and calculate your percentage based on that report. This is an estimation and is in no way to be construed as tax advice, but if you do this each month, not only will you accrue interest on the money put away, but you will rest easy when the time comes knowing that you have the funds there when you need it. Your accountant will be able to help you to fine tune this calculation to determine the optimal amount for you.
To make sure you’ve got your GST covered when it’s due I suggest you run your GST report weekly or monthly and transfer enough to cover it into a separate GST savings account. Set up the bill payment from that savings account when it’s due. The same kind of thing can be done for PAYE. When you run your payroll immediately put aside the deductions withheld, along with any Kiwisaver Employer Contribution, into a separate bank account. When you process your PAYE return at the end of the month, file it with the IRD (online is most efficient) and immediately set up the bill payment to come out of your savings account on the 20th when it’s due.
A lot of businesses that I coach struggle with cashflow, and sometimes putting money aside for taxes can seem tricky as you’re juggling to pay wages because that customer hasn’t paid you yet. There are a number of reasons for cashflow issues, so if it’s an issue for you too perhaps you need to take a closer look at why that is. Are your margins too tight? Does your debtors ledger need managing better for overdue accounts? Should your terms be amended?
Feel free to chat with me if you have any questions or comments about any of these points. I’d love to know how you manage your cashflow or budgets.
I work with business owners who want help with their businesses, either to overcome an issue or two that they are having, or to achieve some business or personal goals. Sometimes a good dose of accountability will do the trick. I have the skills to take someone through the process of getting from A to B. Call or email me to have a chat about your unique business situation.