Daily Task: 15 minutes
Check in with 5 clients. Instructions here.
Project Focus: NOB
This week, we’re giving you a raise.
Yesterday, we set up an increasing wage over time.
Now we’re going to set up quarterly dividend payments from your business to you.
Choose a quarterly dividend date. Usually, 15 days after the end of your quarter is the best day, because you’ll have your end-of-quarter financial reports.
First, decide how much money you need in your business ‘float’. This is, at maximum, two months’ expenses.
Take all money above this ‘float’ line out of your business.
Now look at your Net Profit line on your financial statements for the quarter.
This should roughly equate to the amount you remove from your business if you’re using accrual accounting. If you’re using cash accounting, you might want to wait until the end of the month to make sure your bills are covered. Ask your accountant, “How much CAN I take out?” instead of “How much SHOULD I take out?” because this is a math question, not a philosophy question.
Set up dividend dates for each quarter.
What do you do with the dividends? Move it to the place where you’ll pay the lowest tax rate on the money. It’s easier to save 10% in taxes than to make 10% more in profit.
If you’re in the US, most states tax individuals at a lower rate than they tax businesses. You want to get money out of your business and into your personal accounts fast, and then decide where to invest from there.
If you’re in Canada, the opposite is usually true: you want the money from your business to go into investments without entering your personal accounts first, because your individual taxes are higher than your business taxes. So make your investments through your business on the “expense” line.
*obviously, there are exceptions. Your accountant should be talking about tax strategy with you, and you should take their advice over mine.*
If you’re nervous about having access to cash for emergencies, invest the money somewhere liquid – like in an index fund where you can get your money within 72 hours if necessary.
The key is to pull money out of your business instead of leaving a big lump sum in your bank account. All you need is access to cash and credit to cover two months’ expenses. Anything else is just a security blanket—your business will never go to zero revenue overnight (COVID lockdowns proved it!). 72 hours’ access to cash is plenty.
And don’t forget: emergencies are what credit cards are for. You will probably never have a business emergency that requires cash immediately, but if you do, your credit card will usually cover the gap until your insurance money arrives.
Your business doesn’t need the money sitting around, and money in your account is more exposed to lawsuits, taxes and undisciplined spending. Might as well get it out of there and get it working for you!
You can order the book here: www.simplesix.com
