How an Income Account Can Help You Make More Money

How an Income Account Can Help You Make More Money.png

For the past year, I’ve been using an income account as a part of my weekly accounting process.

Accounting process sounds fancy, but it’s just a workflow process that I use every week. The reason I started using an income account was because I wanted to have a better understanding of how much I truly needed to earn. I also wanted to see if I could run my business with less money each month by only giving my business a certain amount of money to work with.

So about this time twelve months ago, I opened up a new checking account and called it my "Income Account.” And what I learned from doing this over the last year, was that this method is some next-level jedi shit. It helped me reframe how I was looking at my business finances. I learned that if I was diligently focused and tracking income every week, I was diligently focused on increasing the income. Before we get to that, let’s dive into the basics.

First, what is an income account?

Introducing the Income Account

An income account is basically a clearing account. It’s a separate checking account where all my income - which is revenue from products and services - gets deposited. The income account is where I deposit checks from clients and where I set up my payment processors, like Stripe and PayPal to deposit my business income into.

Then every week, I disburse the money that’s sitting in the income account in the following fashion: 

  1. I transfer a portion into my business operating account,

  2. a portion gets saved into a tax savings account and then,

  3. I pay myself via a transfer into my personal account (my bills, bills, bills account).

I never pay for any business expenses from my income account; I only use it to receive income and then make the disbursements I mentioned above.

Here’s what it looks like in practice:

How to Use an Income Account

What’s An Operating Account?

An operating account, or OPEX for the accounting nerds, is the business checking account used to pay for your business expenses. Business expenses are all the costs that are 

"regular and necessary” for running your business. Some examples of business expenses are things like rent for your co-working space, the cost of your contractors, the endless amount of apps and softwares you use, paying your bookkeeper and your lawyer. 

How Much Should You Transfer? 

Before you dive in, first, let’s look at the amount of income your business generates as 100% of a pie. Trigger warning: math ahead. Figuring out how much you should transfer is figuring out how to divide the pie. 

At minimum, you’ll need to figure out how much you’ll pay yourself, including saving for taxes and how much you'll use for business operations. That’s three pie slices. You can always have more pie slices, like retirement savings or a business savings fund, but let’s first just look at these three slices to keep it simple.

Currently, here’s how I allocate 100% of my revenue:

  • 55% gets moved to the operating account,

  • 28% gets paid out to me for my salary,

  • and 17% gets transferred to an income tax savings account.

Dividing the income pie

When I first started this system, I had a larger allocation going to the operating account and less being saved for taxes. That was because I needed more money going into the business to feel comfortable with being able to meet my expenses and have enough cushion. 

In order to figure out how to subdivide your pie, first let’s figure out how much you need for each piece. We do that by looking at how much you’ve allocated in the recent past.

Work Backwards to Deconstruct What You Need to Earn

One thing I really liked about this new process, was how it forced me to look at how I’d been allocating my income. After looking back, I had a better understanding of how my income needed to change in order to impact my pay and how much I could be invest in the business. 

So first, you need to look at recent history to come up with an idea of what this system will look like in practice and if those numbers will work. Yes, it’s time to open up a spreadsheet. 

Calculate the Average Monthly Business Income

First list out how much your business has earned each month over the past twelve months?

Next, figure out what’s the average monthly income has been.

What Did You Pay Yourself?

First, list out how much have you paid yourself each month over the past twelve months? 

Next, figure out what’s the average monthly pay has been.

Then, express that average monthly pay as a percentage of monthly income.

How To Do the Math: Take your average monthly pay and divide it by your average monthly business income


Average pay = $2,167

Average monthly income = $6,250

Pay expressed as a percentage of income = ($2,167 / $6,250 =  .0346) x 100 = 35%

How Much Was Spent on Operating the Business?

Please tell me you have been doing your bookkeeping each month. 

If so, run your profit and loss reports to see your month over month expenses over the last twelve months.

Next, figure out the average monthly expenses.

What is that expressed as a percentage of revenue? 

How To Do the Math: Take your average monthly expenses and divide it by your average monthly business income

Average OPEX = $3,667

Average monthly income = $6,250

Pay expressed as a percentage of income = ( $3,667 / $6,250 =  .0586) x 100 = 59%

Income Tax Savings

If you owed taxes last year, how much did you owe?

Did you have a savings plan? If you did, did you save enough?

Next, express the amount of taxes you owed as a percentage of income? 

How To Do the Math: Divide the annual taxes owed by your annual income. Or you can divide monthly taxes owed by your monthly income.

Example: $10k owed annually divided by $100k of annual income is 10% taxes.

Here’s what your analysis might look like:

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Projecting Forward

Now that you can see what your business did, it’s time to make adjustments to income to see how it impacts how much you pay yourself, how much you save for taxes and how much you have for business expenses.

Here are some examples of how you can project forward:

Step 1: Project a new income number

Step 2 - 4 are interchangeable. 

Play around with the numbers and make sure that the $$$ splits equal the income and the % splits equal 100%.

A Few Big Fat Caveats


Depending on your income, you might save more for taxes, but I’m super not bummed about that. You can use the extra cash for retirement savings, you can reinvest it into the business or you can pay yourself a bonus.

Contractors + Payroll

You might have some logistical issues if you’re using a payroll service provider and paying contractors. You’ll need to make sure your operating expenses will always cover your contractor and/or staffing costs.

Keeping Track 

The only way that this method works, is if you use it consistently. I know, how annoying of me to ask you to look at your finances on a regular and consistent basis, but it’s like all the other things in your life. Here are some examples that will not just annoy you, it will help me drive the point home. If you want to be a writer, you probably have to write every week, if not every day. If you want to be fit, you have to consistently not eat crap and consistently move your body. If you want to get good at playing an instrument, you have to practice a little bit over a lot of time. See how that works?

So the best way to keep track is to use a spread sheet that you update each week. I made one for you, because I’m fucking cool like that.

The Results

What I learned looking back was that I needed to increase my income by a lot more than I thought. Over the last twelve months, by looking closely at income, I was able to examine what my opportunities were. I looked at ancillary services I was providing and realized by amping that up, I could easily hit higher targets. Thinking about your business in this way is essential if you want to run a business.

Paco’s Law: Expenses expand to reach the limits of what's available to spend

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I’m sure you’ve heard of Murphy’s law; an old adage that states "anything that can go wrong, will go wrong.” And then there is Parkinson's law that basically boils down to: work expands to fill the time available for its completion.

Now, I’d like to introduce you to Paco’s law. 

Paco’s law says that "expenses expand to reach the limits of what's available to spend”. In other words, you’ll spend whatever is available to you to spend. This isn’t true for every person out there and (disclaimer) the data set I’m observing is incredibly flawed. But the amount of people who reach out to me who are looking for help, advice or tips in this specific area of finances is so huge that there should be a law for it. 

Step 1: If You Didn’t Know, Now You Know

Knowing about Paco’s law is the first step to not totally becoming a victim of it. Understand that if you have observed yourself to be in the majority of people who spend as much as they earn, then you should start setting up systems to protect yourself against yourself. 

Step 2: Setup Separate Spending Systems

The key is to exploit the loophole in the law and limit what’s available for you to spend. I’m an annoyingly vocal proponent of having separate accounts for your bills and your non-essential spending. Let’s call the non-essential stuff, fun and b.s.

In order for the system to work, you must earn enough to cover your bills, debt payments you have, savings and then whatever is leftover can be blissfully spent on crap you probably don’t need, but you definitely want. (Read this if you need to help figuring out how much you spend on bills each month).

It might sound like having another account to simply your life is counterintuitive, but you need to keep the bills and the fun separate for two reasons. The first is to make sure you don’t accidentally spend bills money on fun stuff. The second reason is to make limiting your fun + b.s. spending super freaking easy. So easy that you won’t have an excuse for not “budgeting” anymore.

In practice, there are two ways to do this. The first option is to put your entire paycheck into your bills account. Then make transfers to savings and the fun + b.s. accounts. So money goes into the bills account and then you transfer it out of there to the other accounts. This first option is perfect for people with variable income. It’s also great for when you’re first getting started and used to this system. Here’s what it looks like in practice:

Paco's Law

The second option is to send money from your paycheck to your bills, various savings and your fun + b.s. account. The second option forgoes first putting all the funds into your bills account.

This option is great for people who have a fixed paycheck. You might be able to set it up automatically - which can be a good and bad thing. Good because you remove yourself from the equation. Bad because if you aren’t involved, you might become disengaged. Engagement is the key to making this work.


Step 3: Would You Just Look At It?

If you have lots of cash in your accounts and you do a great job already, you can probably go more than a week without eyeballing your accounts. But if you’re not a jedi yet, you have to look at your accounts. YOU. Not your partner or your mom or your assistant. YOU, homie. Stop not taking responsibility for your shit.

Caring about your finances: this is your life meow.

How to Be "Financially Responsible"

How to Be Financially Responsible | The Basics of Financial Responsibility

One of the most frequent financial struggles that people talk to me or email me about is having trouble being "fiscally responsible".

When it comes to doing the things one ought to do with their money, according to what I've learned from the industry and society at large, we fall short in a few common ways. Most people have trouble saving when you know you should save, curbing spending on bull shit that you don't need and understanding how the financial markets and economics. I get it. I make weird choices too. A lot of us do it because we're emotional creatures that act on our feelings


How to Catch Up On Your Bookkeeping

 Photo by Wes Hicks

Photo by Wes Hicks


Staying up to date with your company’s bookkeeping is an uphill battle. When I first started my business, I didn’t update my books for a handful of months - nine, to be embarrassingly honest. As more time passed, more work added up and my fear of tackling it all grew to a critical mass. When I finally sat down to do all the work, I cursed myself and promised myself I’d never let me books get that out of control again.

I’m sure as tax season closes in many of you might also be filled with this same sense of dread. If that’s the case, worry not. Although we offer catch up bookkeeping over at Hell Yeah, Bookkeeping, there are lots of small business owners who prefer to handle bookkeeping on their own. If you’re in the latter camp, here’s a step-by-step guide to help you get your caught up on your bookkeeping. Let’s dig in.


Step 1: Sort and Organize Your Documents

The first step is getting organized. You’ll want to start compiling invoices you sent to customers, receipts and/or the bank and credit card statements where you made purchases that are business expenses.



Find all the invoices you sent to clients and organize them in one place. Make a note of what invoices are still outstanding, if any. The invoices and their status (paid or unpaid) will help you compile your business’ income or revenue and your receivables (what’s owed to you).

But of course there is a caveat. You’ll need to know what accounting method your company uses to operate. The two methods here in the U.S. are cash and accrual. Most businesses operate on a cash basis. If you don’t remember, you can ask your accountant to confirm.

For a cash basis business, you technically only need to send the customer an invoice once they have paid. For accrual accounting, you record the income when the sale occurs.

For example, let’s say you made a sale in the amount of $1,500 in December 2017, but the client didn’t pay you until March 2018. With cash method, revenue isn’t recorded until March 2018, whereas with the accrual method, you’d record the sale in December of 2017.


Collect on Debt

Sometimes you’ll have invoices that are outstanding for a long time. At some point, you might need to cut your losses. In order to do this, you must first make a concerted effort to collect on the debt. If that doesn’t work, you can charge off the debt using accrual accounting or non-accrual experience method. I know, the names of these methods really just roll off the tongue, huh? 

For accrual accounting, when a customer flakes on their obligation to pay you, you’re able to write off this off as bad debt expense. Remember, you’ll need to prove to the IRS that you took reasonable steps to try to collect on the debt and recover the loss. The specific charge-off method means you can deduct a specific bad debt that becomes partly uncollectible during the year.

You can use the beautifully named, nonaccrual experience method to deduct what you were unable to collect. The deduction would reduce your gross income for tax purposes.


Separate Business and Personal Expenses

Most accountants will tell you that they prefer it if you’d keep receipts for every single business expense. Of course, this doesn’t always happen. But most accountants will advise that you should still deduct legitimate business expenses even if you didn’t keep the receipt.

At any rate, gather all your receipts for your business expenses and organize them in one place. I like to scan everything to Google Drive or Dropbox. I also like to include the date of the expense in the title of the scanned file so it’s easy to reference the receipts by date.


Vendor Invoices

If you’ve paid vendors and contractors, you should make sure that you’ve got all these invoices and bills organized in case you need to access them for an audit. If you don’t have all your bills, you can simply reach out to your contractors and vendors and ask them to send you whatever you’re missing.


Step 2: Update + Reconcile Bookkeeping

Now that you’ve gathered everything together, it’s time to get into your bookkeeping software updated and reconciled with your bank accounts. Bank account reconciliation is when you make sure your accounting records match your bank and credit card statements exactly. Each transaction in your account should be categorized and entered into your bookkeeping software. It sounds redundant to replicate your banking records within an accounting software program, but the software can allow you to run reports that your bank doesn’t. Reconciliations ensure your records are accurate.

Make sure to spend the time needed to ensure your accounts are accurately reconciled; it may be costly to have a bookkeeper or accountant go back and fix your books if they aren’t.



Hire A Bookkeeper

If you don’t have a bookkeeping system, you have a few options. First option is to hire a bookkeeper to put your books together for you. This method will likely result in the most accurate records, saving you time, but costing you more to pay for someone else's time and expertise.


Use Your Statements

One method to add up all your expenses is to use the bank statements and credit card statements where the transactions occurred. For any expenses that were cash, you’d have to add that back in after. This method is super easy if you’ve kept your business and personal expenses separate. It’s not recommended for a long-term solution because you won’t be able to accurately and quickly generate financial reports.


Use Your Receipts

If you saved all your receipts, another method is separating your them by expense category and adding up them all up. Again, this is not a long-term solution or long-term bookkeeping alternative. It’s only a very small, limited picture of your company’s finances.


If you'd prefer to outsource all of the bookkeeping work and your feeling of existential dread, please get in touch, we'd love to help.

Why You Aren’t Achieving Your Financial Goals

 Photo by Jad Limcaco

Photo by Jad Limcaco

Goals are the measurement of the vague things we are chasing in our lives. The goal of success can be boiled down to a certain amount of money you earn a year. The goal of being healthier can be measured by your weight or the amount of miles you can run without stopping.  

Habits are the things that will influence your ability to achieve your goals. The good habits help you reach your goals and the bad habits will hinder you from the sweet, sweet glory of achievement. Ultimately, habits influence our automatic behavior and our automatic behavior influences our day-to-day life.

The difference between habits and goals is the action required for each. For example, you could have the goal of saving $500/month or you could have the habit of saving 5% of everything you earn. Creating a budget for the year is a goal, but implementing a system for sticking to it is a habit.

I’ve watched myself set goals and achieve them. I’ve watched myself set goals, grow exhausted, fight a cruel internal dialogue and ultimately fail at what I’d set out to do. At the same time I’ve watched myself build habits without a focus on goals and it’s amazing what I can achieve when my internal dialogue stops and my habits just kick in.

And for the last couple of years, I've joked that my goal is to have no goals, but the more I spend time watching the clouds and thinking about my life, the more I am compelled to quit having goals. 

The Problem with Goals

Goals are flawed to the point that they undermine what they set out to achieve. Goals rely on factors which are outside of your control, they have an endpoint and they require you to try to use your willpower.

There are so many factors outside of your control that impact your finances. The new tax code, a disruption in your supply chain or unexpectedly getting sick are all things that can impact whether or not you achieve your goals.

Goals have and endpoint which makes it easy to revert back to bad habits. Some people reach their savings goal, but spend it all a few months after.

Goals rely on willpower, which cannot be trusted in the long run. Willpower isn’t an automatic behavior, it’s like using a muscle. Overtime if that muscle is working hard, it can get tired. For example, trying to save money by spending less requires willpower and discipline. But automatically having a portion of your income going into savings is a habit that doesn’t require any willpower.

Some studies even cite that goals can cause risky behavior. Some people get so focused on achieving the goal that become blind to anything that appears unrelated to achieving said goal. There can be an overemphasis on short-term thinking or unethical behavior as a result of trying to reach an unrealistic goal.


The Power of Habits

Habits make things that were once difficult easy because habits are automatic.

Habits are easy to complete. You’re no longer beholden to your crappy willpower because habits literally rewire your brain. Your brain changes so the habit becomes easier to enact the than not doing so. You don’t have a mental battle about whether or not you’ll brush your teeth in the morning because it’s a habit that’s so deeply ingrained.

Habits can last for life. Our lives are structured around our habits and once a habit is ingrained, it can last for a lifetime. 

Habits can compound. A single habit can have a deeper and wider impact on our lives. Creating a habit in one area of your life can have an impact on behavior in other areas of your life. For example, someone who starts exercising might also eat less processed junk food. If you start automatically saving money in an emergency fund, you might find yourself making better choices when you're shopping.

Sometimes habits naturally allow you achieve more than your goals because of the automatic nature of them. It’s possible to still achieve results by ignoring goals and focusing on habits and systems. For example, a basketball team can still win a championship even if their focus lies in doing their best at each practice and each game. I've never had a goal with my meditation practice and now I'm going on year six of consistently meditating. When I shifted my focus on habitually adding value to my client's lives and businesses each month, I made more money than when I was focused on an income goal alone.

Fall in Love with Systems

Goals can be a source of joy when you are able to achieve them. Like so many things, they work until they don’t work anymore. And when that happens they can be a source of frustration. In order to continue achieving your goals, you’ll need to constantly seek motivation and inspiration. You’ll constantly be drawing from the ever-depleting well of self-discipline and willpower. You’ll be exhausted over the long haul.

The self-preservationist way around this is to create systems in your life, especially your financial life, that will remove your chatter-filled mind from the driver’s seat. Create systems for savings and fun spending so that instead of wasting time and energy asking yourself if you can afford this new thing you want but you don’t need, you already know that you’ve set aside money for savings, taxes and fun.

As you think about what it is you seek in your financial life, invest the time to understand what are the positive habits you need to form instead of becoming singularly focused on a specific goal.

What Is Year-End Tax Planning? (And Why You Need It)

If you've never had an year-end tax planning meeting with your accountant it could be because you have a very "easy" tax situation. For example, you're a single, renter who has a salaried job, with no side hustles or dependents. Easy. You don't really need a tax planning meeting because you're paying taxes as you earn your income.

What Is Venture Capital Funding? Is It Right for Your Business?

What is venture capital?

Venture capital (VC) is funding given to businesses from investors.

It’s called venture capital funding because it’s funding from the specific investors known as venture capitalists.

Investment from venture capitalists can be more than money. In addition to cash, VCs often invest in the form of technical or managerial expertise. It’s not their first rodeo, so they can impart some wisdom.

Accounting 101: A Primer for Small Business Owners

Accounting is a process of sorting financial data. Through sorting the data, the accounting process creates products. The products are reports. These reports are useful to the  management team, business owners and shareholders or investors. The reports also play a pretty vital role in helping your accountant file your taxes.

How to Tell If Your Business Is Doing Well

You don’t need to do a lot of digging to determine whether or not your business is doing well. You can feel it by just observing the day to day operations. When you’re able to pay all your bills, pay yourself and your employees and you have money left over in your business, it’s pretty obvious that things are going pretty swimmingly.

But instead of flying by the seat of your pants or letting your socials statistics determine the health of your company, let’s observe some factors that will allow actually you to determine the health of your business. There are a variety of measurements to choose from. They range from simple observations to more complex ratios.

What Is a (Business) Line of Credit?

Lately I’ve been working with a lot of small businesses that are growing rapidly. It’s awesome to watch this unfold, but one thing I’m learning quickly is growth comes has a cost. Whether you’re selling products, providing a service or manufacturing something, in order to grow, you need to invest in the business.

As I’m sure you’re painfully aware, business doesn’t happen in a neat timeline. Cash flow timing issues are very real. For example, there’s the furniture designer who is bringing on more staff, expanding to be a bigger storefront and signing new accounts. There’s the retailer who needs to make a purchase from the manufacturing company and the larger order comes at the best price. And then there’s wedding photographer who needs to pay her tax bill during the slow season. A line of credit may be an option to help bridge the gap.