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The Annual Leave Account

Jan 27, 2020

I want to share with you an idea of mine that my clients have found quite useful to manage cashflow over the holiday period, and that is the Annual Leave account.

In New Zealand the end of year summer holidays can often be tricky because you may not be earning as much, and yet you still need to get paid, you still need to pay your staff, and you still need to pay your bills.

The simple solution is to set up a new bank account, I simply call it Annual Leave, and transfer regular weekly or monthly amounts, ideally starting from the beginning of the year.

Take the number of weeks you want to take off each year, in my case it's 6, multiply that by your weekly drawings & tax amount (see below for more on this), add in the monthly business expenses (this would include any staff wages of course), divide by 52 and that's the amount that goes into your annual leave account each week. Obviously, divide by 12 if you want to do this monthly.

When I go on leave I transfer that money back into my main business account and I continue to get paid as normal.

If you have staff I suggest you have another separate account for their leave liability. Run a leave liability report from your payroll software and reconcile that account monthly, transferring funds between accounts to ensure you have the correct amount set aside.

Some of my clients also have another bank account for Xmas expenses which is for staff and client gifts and the staff Xmas function etc. It's helpful to set your budget for this at the beginning of the year which avoids overspending at Xmas time.

Pay yourself regularly

I sometimes hear of bookkeepers not paying themselves and thinking that it's just the way it is when you're in business. It's not. You need to get paid.

I pay myself a regular weekly drawings; a certain amount goes to my personal spending/living account, and another amount goes to my tax savings account.

If you're not paying yourself regularly I stongly urge you to do so. Even if you have to start small, get into the habit of paying yourself regulary. It changes your mindset around business. As you build your business keep reviewing that figure and keep increasing it as your business grows.

Once you are paying yourself regularly it's easy to figure out your regular annual leave amount.

Now's a good time, at the start of the year, to put these regular transfers and accruals into place. If you have any questions about how this works, or how it could work for your business, do reach out. 

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