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Structuring Bank Accounts to Help Manage Cash Flow 

cashflow management financial management structuring bank Aug 27, 2021

Imagine going to a buffet restaurant and picking all the food that you love and stacking them all on your plate. You might be enjoying a few moments while you are eating it but as you stack more and more on your plate, you realize that your body is now slowly rejecting the food and you realize that you’ve had too much to eat. 

It turns out that your mind is playing tricks on you. When you have an abundance of food available, your brain tells you not to stop. The same goes for eating food off large plates. The more food you can fit on your plate, the more your brain will tell you you want to eat. 

This kind of idea and concept is also applicable to the different aspects of our lives and is similar when it comes to finances.  

When it comes to finances, a huge amount in your bank can provide you with a feeling that you’re good for the next few months of your life or you may feel that you are wealthy and there is nothing to worry about.  

As human beings, when cash is available on our banks, we usually spend it as we see fit. But this kind of reaction can lead to trouble. Spending money on things that are not needed is a no go. 

Over the years, research proves that when you think of having to use a small plate when eating, it will result in reducing your consumption of food. This effect is known as the Delboeuf Illusion. 

Delboeuf illusion is an optical illusion of relative size perception.  This illusion uses both assimilation and contrast as elements when perceiving things. Thus, when one is given a larger plate to fill, he or she may put in more and more food than those who are given a smaller plate. 

This psychological concept can be applied when keeping your cash in your bank.  

In this article, we want you to understand a cash flow management framework that will ensure you that you will never hit rock bottom again.

Using Buckets for Holding Cash 

Plates are never practical in holding cash. They cannot hold as much as you want them to, but by using buckets, we can think that we can stack piles of cash and keep more money. 

Plates and buckets that we are using in this article are just metaphors. What we really would want to let you know is how to break down the bucket methodology when it comes to managing your cash flow. 

It is a general rule that to effectively and efficiently manage your cash flow, it should be paralleled to the amount that you spend. 

The cash in the company’s bank should only be intended for the company’s activities. 

Here are 4 steps that you can effectively and efficiently manage your cash flow: 

STEP ONE: SET-UP DIFFERENT BANK ACCOUNTS 

  • Create an account that is intended for your day-to-day transactions - Your Transactions Account: 

Having an operational account that is intended for your day-to-day transactions will help you track the cash that you have been spending and it will also provide you peace of mind knowing that there are no transactions that you may have missed or whatnot.  

  • Open a savings account that is intended for the provision for your Income Tax, BAS, and Superannuation - Your Tax Account:

These are expenses that comply with the mandate of the government. Although essential, these expenditures are classified differently from other company expenditures. It is best to create a different account so that you will be able to monitor and will not lose track of any government liabilities and obligations.

  • Open a savings account that is intended for your Operation Expenses as your fallback in case of cash shortage or in any emergencies - Your Safety Net Account

Prevention is always better than cure. Having a plan B when emergencies occur can save the company’s operating expenses. An amount that carries at least 2-months' worth of the company’s operating expenses is the most ideal.  

  • Open a Capital Allocation Account 

You can store your surplus cash in your business in this account. This surplus cash is the money that you are actually allowed to spend on growing the business, use to invest in assets, reduce debt or pay dividends to shareholders.   

STEP TWO: GET YOUR BUCKETS FILLED 

Fill your buckets with the cash that is generated from your business. Make sure that you also provide the right amount of cash in all of the different accounts that you have set-up, so that you can ensure any movements. 

STEP THREE: ANALYSE THE PURPOSE OF YOUR CAPITAL ALLOCATION ACCOUNT 

Analysing the purpose of your Capital Allocation bank account will greatly help achieve the goals of the company. It will guide you in which direction your business will go in the future. 

Decide on what is best and needed for your company. You can either reinvest back into the business, expand, or divide the surplus to shareholders.  

Whatever the decision, make sure that it can produce financial returns and make sure to manage it accordingly. 

If you have any questions, don’t hesitate to contact us here at Stream Accounting and we will surely provide you with the answers that you seek. 

 

 

 

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