This transcript was generated from the episode audio and may contain minor errors.
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Is there a purpose in having more than one business bank account? Now listen, some of the first advice I give to new side hustlers is to open a bank account, a business bank account that is apart or separate from your personal account just to track all expenses and generally keep things separate. So most people do start with a single bank account for this purpose. But as the business grows, you might actually need more than one. You've got some taxes to plan for, reinvesting in the business and actually paying yourself, which is a big part of what I'm gonna talk about here today.
The money tends to blur together and that's not always good. So we've got a listener question today about having more than one business bank account. Is that just over complicating things? When can it actually make sense and help you run a more profitable and stress-free business? And that's our overall focus, right?
Helping you have a more profitable and stress-free life and how your side hustle or small business can be part of that. So let's talk about it. The detailed question and my answer coming up after this quick shout out to our sponsor. [Music]
Hi, this is Jordan calling. I've been running my side hustle for a little over a year and I'm starting to take my finances more seriously.
Up until now, I just had one business bank account where all my income goes in and expenses come out. But I recently heard some business owners talking about using multiple accounts to manage their money. I don't totally understand the purpose of doing this. Wouldn't it just make things more complicated? What's the benefit of having more than one account?
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So at first glance, having multiple business accounts might seem unnecessary. And ultimately, if you have a very simple system that works for you, then that's okay, right? Don't stress yourself out. But here's the thing. As your business grows, using multiple accounts helps with cash flow management, long-term profitability, helps you plan for taxes.
And so there's a couple of proven models for this. Two of the most well-known, they come from two friends of mine, Mike Michalowicz. He developed a system called Profit First. And Donald Miller has a system of his own. I don't know if Don's system has a name.
But just to look at it quickly, the Profit First model by Mike, he argues that most entrepreneurs spend first and take profit last, which is why a lot of small businesses struggle financially. And so his system flips that around by dividing money into separate bank accounts based on specific purposes. So he's got a whole series of accounts that you set up, and you can see them all in one screenshot. So it's not like it's out of sight. But basically you can see your income account, which is where all revenue flows, like you take your money in here, deposits go there before being allocated.
Then you have a profit account, which is a percentage of every dollar earned gets transferred to the profit account that ensures you always take some profit instead of waiting until someday. Then you have a tax account, you have an owner's pay account, and an operating expenses account, which covers your day-to-day business expenses. So as I said, it might sound complicated, but it's really worth exploring it, especially as your small business grows, because this forces you to prioritize profit, control your spending, and avoid cashflow surprises. It's really helped a lot of people. So Don Miller, he's the author of "How to Grow Your Small Business." He's built a pretty big business now.
It's a small, medium business called Business Made Simple. He recommends a slightly different approach that is still built on cashflow clarity. And he basically suggests you have an operating account where all your revenue is deposited, your business expenses are paid. Then you have a tax account, which keeps tax money separate so you're never caught off guard when payments are due. And then you have this profit account, where you're pulling out money at regular intervals, ensuring that you actually take money out of the business, which is a pretty important goal of your business.
And a lot of people kind of miss that in the day-to-day, and they end up kind of with the high expenses, and they're like, all this money's coming in, but I don't, like, where's the profit? So this is why having multiple business accounts can help you with this financial discipline, not just to spend less, but actually to make sure you get paid. So there's more to be learned about that. Like I said, I recommend Mike's System. If you're in that situation of your business is growing, but you're not quite sure where the money's going and why aren't you profiting more.
But it's also okay when you're starting out to just have one business account. Biggest thing is to make sure you keep your personal spending and your business spending separate so that you can get those tax deductions and otherwise just have an idea of the financial health of your business or your new side hustle. I hope that's helpful, listeners. If you have a question, a comment, an experience, sidehustleschool.com, we got resources there, notes page for every episode and more. I'm excited to go into the next part of the year, a new season, in fact, with new episodes, seven days a week, always completely free, complete archives available on the website.
But that's all for now. My name's Chris Guillebeau. This is Side Hustle School. [Music]
From the Onward Project.
