The Real Estate Business Mistake That Could Cost You Thousands of Dollars and Your Sanity

The following was written by guest blogger David Richter of SimpleCFO Solutions.

We all love control.

I have a six-year-old daughter who constantly pushes the boundaries of her world. Whether it’s brushing her teeth or buckling her car seat, she loves to feel in control.

Isn’t this the case with you, too?

Imagine you’re right about to take out the garbage unprompted… and then your spouse tells you to take it out before you even get a chance to. Now you’re dropping the trash bag on the floor and telling your spouse to do it because it is no longer your idea… it’s theirs.

How about when it comes to your money? Do you want to feel in control of your cash?

Every human has some emotional tie to money. It’s frustrating and stressful when it feels like your money goes in one door only to go right out that same door the next day. How about those gas prices, huh? Or as a real estate investor, what about those interest rates? Completely out of your control.

Let me ask you this: when you jumped into real estate or entrepreneurship, did you say to yourself, “The money part will just work itself out as long as I keep bringing money in?” Maybe you’re doing great or maybe you’re feeling stuck in the grind, living deal-to-deal, and wondering where all your cash is going.

I am not going to overwhelm you with a bunch of complicated financial mumbo-jumbo.

As a fellow real estate investor and business owner who helps entrepreneurs become more profitable, I’ll show you real, actionable steps you can take to take back control of your business. I want to put the power back into your hands so that you can have more profit, more time, and more freedom to do what you love.

After talking with hundreds of business owners, I’ve discovered that the ones who feel financially out of control have the same underlying problem. They’re making this one mistake that is costing them their sleep, sanity, time, and money…

Here it is:

Running their business (or life) with only one bank account.

What?! It couldn’t possibly be that simple!

Oh, but it is.

Tossing a cash salad

How can having one account cause so much trouble?

When you have one account, you don’t have control over your cash. Your money flows in, and then your money flows out. And whenever you open your banking app to see your bank balance, you wonder if what you’re seeing is a true reflection of what you have.

Are you making a smart, informed business decision? Or are you about to make a costly mistake? Is this your money to spend or is it owed to someone else?

Are you sure you can afford that $5,000 marketing campaign? Or a VA for $8/hour? Or have enough to subscribe to that latest CRM or software!?

“Let’s open up the app and check the balance to see if we have it…”

“Oh, we have enough? Then let’s spend it! You have to spend money to make money, right?”

What you’re really doing with one bank account is tossing your cash – like a cash salad. Money in, money out, throw the money all about. Close your eyes, swipe your card and hope you’ll have enough in the account for tomorrow. That’s how most people make the money decisions in their business. If you are this person now, you are not alone. There is a better way!

The better way

What is that better way? Glad you asked. There are two parts to fix the mistake of one account.

1. Bank Balance Accounting

Remember in the paragraphs above how I mentioned you checking your bank balances? I know that most business owners look at their smartphone banking apps 10 times more than they look at their P&Ls and Balance Sheets.

Let’s leverage what we’re already doing instead of trying to become a financial expert overnight. I want you to fully utilize the habits and resources you already have in place.

2. Modernized Envelope System

If you’re a fan of Dave Ramsey (or not), you may have heard about the envelope system. This is where you stuff cash into labeled expense envelopes for your personal life to track your budget in various categories.

For example, when you spend all the money in your Grocery Expense envelope, you’re out of grocery money until you get paid again. We will use this concept in tandem with bank balance accounting to help fix the mistake. The modernized envelope system is the process of opening multiple bank accounts and naming them specifically for each business purpose so you know that every dollar has a home. Give every dollar a name.

Combining the parts

What are the accounts to open?

All you need to do is open four bank accounts (and learn how to “flow” your cash) to have control of your cashflow (and your business).

Here they are:

1. Income
2. Profit
3. Owner’s Pay
4. Owner’s Tax

Next, you’ll want to change the name of your single bank account from “Cash Salad” (just kidding) to “Operating Expense.” Essentially, we’re transforming your all-purpose account into a single-purpose account where you’ll pay your business bills and employees.

The flow

Any time you get revenue from your business, you’ll want to put it into your Income Account. Next, you will allocate (or flow) your Income Account money to your other bank accounts according to a dollar amount or percentage you set for yourself.

Here’s the purpose behind every account:

Profit. This is your reward account for being the owner who decided to take a risk, invest your hard-earned dollars, and endure sleepless nights to keep the business alive. Once a quarter, you’ll draw from this account to go on that dream vacation, make memories with your family, or even pay down your personal debt!

Owner’s Pay. A separate bank account just to pay you – the owner – so you can support your current lifestyle. No more hoping for leftovers at the end of the month (or year).

Owner’s Tax.  A “do-not-touch” bank account where your business puts away money for your business and personal taxes. As the business owner, the business should be paying for YOUR taxes, not the other way around.

Operating Expenses. Your newly named bank account where all the leftover money goes to pay your company bills and employees.

Here’s an example flow table for all you visual learners: