One of the things I’m always trying to impress on my business advice clients is the need for some spare cash in the business. On different days, I’ll be found talking about building up a war chest for further expansion, or getting some slack in the system so that we have the resources to develop new things, or keeping the owner’s remuneration down to a minimum to make the business’s cash flow healthy, and then having some money to pay out a nice dividend when it’s built up to a nice lump sum.
A healthy business doesn’t worry about corporation tax.
Very often, business owners with very nice, profitable businesses have a big panic when it comes round to paying corporation tax. Corporation tax sometimes feels like a disincentive to make money – the more you make, the more you have to give away. And you have to give it away to the government all in one lump sum, causing a panic wave to crash through your cash flow.
A healthy business doesn’t worry about corporation tax. Sensible, prudent business owners have stashed away their corporation tax (or their personal tax liability) in a nice savings account, earning interest. Sometimes, the business needs to borrow a little from this account, just to avoid going overdrawn, or because a client takes a while to pay an invoice, but then the healthy business can pop the money back into the savings account.
Can you be sensible?
Some business owners are born sensible. Some of us are a little more reckless or entrepreneurial, and have to learn to put the money away. And for some people, being sensible and avoiding the headaches of cash flow nightmares is just plain boring, and none of us want to be boring, do we?
Where, when and how much?
So, here’s some free advice. For every £1000 profit you make, put £220 into a savings account. An ISA is a nice idea, as you can get free money (interest from the bank) and not pay any tax on it. Do this every month, for every single £1000 you make. Don’t leave it in your business account, it will make you feel more rich than you really are, and then you won’t push to get the new money into your business account, or you’ll spend it.
Why the extra £20?
Ah, you thought I’d used the wrong corporation tax figures, didn’t you? I’m suggesting 22% of your profit should be stashed away into your ISA or savings account, not just the 20% you need for the corporation tax (or your personal tax if you’re a sole trader). That way, when you pay your tax bill, you’ll have some money left in the savings account. And you’ll be able to spend it on marketing, a new member of staff, or a big pile of chocolate. Whatever you do with it, I guarantee that it will put a huge smile on your face, which is what I like to see.