Saving hard-earned income from a business is a practice that in theory we know we should do and we should do it often. Putting away some of the in-goings so that we live to see another day is important. It’s when we see that large number in our account that there is an overwhelming (and completely normal) response which urges us to spend it. The following month or quarter or year the bottom line of that account begins to look a little on the anemic side at best.
Protecting your flanks
At One Week At A Time how to manage income is a topic many Business Leaders raise. A popular way to explain how to manage inflows of cash is through using the old American saying “don’t eat your seed corn”. Sounds like something someone would say in the 1852 story, Uncle Tom’s Cabin (written by Harriet Beecher Stowe), but it’s a powerful saying that - for want of a better expression - yields results.
Don’t eat your seed corn is a farmer’s saying and it means “that every seed that comes through your hands has the potential to either be eaten or planted for next year’s harvest. You need to make sure that your farm always has enough seed corn to replant the fields on your land so you can enjoy another harvest, next year. If you eat [all of] your seed corn, you won’t have anything to put in the ground and you lose the farm”.(1) The concept behind this story is that by storing away some of the cash that is produced from a business, that a future investment can be made from those savings.
Common Sense Set Up
Before we explore a simple set up of funds, it’s important to note that once a Business Leader decides to engage in a financial change, that they seek out expert legal advice. One Week At A Time are not tax accountants, lawyers or wealth managers (and if you do need those people we can certainly point you in the right direction). What we discuss in our series is the principals behind setting up a business and other areas such as common sense account management (rather than the ins and outs of financial advice). For Business Leaders who are looking to divide their funds the common sense way and to follow what we have found work for our clients, here are three accounts to consider setting up (as a bare minimum):
- Trading Account.
This is the main account which receives/pays for all the day-to-day activities of the business.
- Compliance Accounts (two separate accounts)
One would hold the GST and the other to hold Pay-As-You-Go. It’s a good idea to also research if there are other legislative mandatory funds such as long service or annual leave which the business must hold and decide how those funds will be held.
- Profit Account.
And herein lies the seed corn. An agreed allocation of profits which are gathered from the business can be placed in this account. For example a percentage or proportion of each sale is placed aside in this account. The magic of cumulative interest will start working for the funds placed in this account.
The above would be where a business could start in managing their accounts. Your business may want to set up an additional account for a “rainy day” to hold 3 months worth of monthly overheads, just in case there is a quiet patch that has extended out longer than the business expected.
Tipping in and staying out
The Profit Account is designed to allow the Business Leader a platform to have a future. Perhaps, rewind that thought back for a minute, and think about what a business does for the Business Owner and Business Leader. It’s not often that people share this fact about what businesses actually do:
When a person owns a business, the business itself is not necessarily going to make that person wealthy. If they sell the business for a large amount, then yes, that can be true, however more is the case that wealth comes from the investments made using the cash brought in from the business. How that investment dollar has managed the yields from those investment decisions will determine the level of true wealth.
As amazing as all of this sounds, creating true wealth requires just one very difficult behaviour to remain constant. That is, tipping in regular deposits into the Profit Account, and more critically - staying out of that account (refraining from making any withdrawals for non-wealth building investments).
A glimpse of Greener Pastures
Setting goals to create a long-term personal future is the next step in not eating your seed corn, harvesting for seasons to come and finding areas in which to grow that investment capital. There are many areas a Business Leader can explore to grow their Profit Account including further building the current business, although we don’t recommend that option at One Week At A Time. What out team suggests to Business Leaders is that they take those savings and purchase accumulative assets not related to the core business, such as property, stocks and bonds and even derivatives. We also strongly suggest before making a move in any of those directions, to research thoroughly each area so that it suits the end purpose and goal.
A Profit Account is an active representation of freedom for a business (who knew finance could be exciting!). Business Leaders in possession of a healthy Profit Account may use the funds to buy a run down business that, with some talent and industry know-how, wouldn’t take long to turn around. Whatever the choice winds up being, there is certainly an abundance of opportunities and many pastures to explore without leaving the paddock that you’re currently in. All it takes is a small step and a lot of discipline.
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(2) Kiyosaki, R. T. (1997). Rich Dad Poor Dad. TechPress Inc. Arizona. USA.
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