A business bank account is the vehicle we use to manage the money that we receive through an entity structure. So, think of it as a ledger for processing your businesses incoming and outgoing cash activities. What happens all too often is people treat their business bank accounts the way they treat their personal bank accounts; they check the balance of the account for cash available and then they spend. That’s it. No preparation. No fore thought. No budgeting. This kind of behavior can have catastrophic outcomes for a business owner. Keep reading to learn tips to better manage your business bank account
As you can imagine account types are pretty basic, checking and savings. What is not so basic are the best practices in setting up and managing these accounts. While there is no right or wrong way to get established, there are some things you can do to help make the process of running the money a bit easier. One of those things includes setting up 3 checking accounts and at least 1 savings.
The first checking account should be used for operations. This would be the account where all of your deposits are made, all check/ach withdrawals are written out of, and credit card payments are processed. The 2nd checking account should be used to cover payroll and payroll tax. You’ll want to do this to ensure you always have enough cash to make payroll, and also to keep from co-mingling expenses and potentially overspending. The 3rd checking account should be for your tax payments. If you’re really on the ball you might consider transferring 30% of your income per month into your tax account. I would even suggest transferring the money as soon as the deposits hit. I call this the out of sight out of mind approach. If you don’t see the money in your operating account then you wont spend the money. That way you are not forced to get a loan to pay your tax bills when they come due.
The savings account should be used for growth goals. If you know that you want to move to a nicer office or purchase a new company vehicle, you will need to save money to ensure the company can afford it. And setting up a growth savings can help you to reach those goals much faster. Too often people assume that the more money the company makes the less you need a budget and a proper spending structure. I think the opposite, the more money you make the tighter the rains need to be on tracking. Seeing deposits coming into your business bank account can give the false comfort that there is more available to spend than what is truly there. And if you are not moving money around, segregating what is available to spend from what is not, then you run a huge risk of mismanaging the funds.
When To Get A Business Bank Account
There are two clear indicators that it is time to get a business bank account. When you make your first sale or when you spend your first dollar on your idea. This logic applies to all business types, whether your business is a startup, an ecommerce shop, a freelancer, or anything in between. Entrepreneurs often wait too late forcing personal bank account use for business spending. This causes commingling that ultimately leads to confusion at tax time. Consider your personal life, buying a house, or car you have to clearly distinguish what the business earns and how much of it you get to keep. Not to mention any type of business funding will require clear business earning and spending delineation from personal.
How To Never Overdraft
Let’s face it, overdraft fees are annoying and can add up quickly. The problem with overdraft fees is not necessarily the fee itself, its actually the negative record it leaves on your bank account. This is an indicator to lenders that the business struggles with controlling spending. Which ultimately could affect being approved for loans or lines of credit. A good way to avoid over drafting (spending more than you make) is to budget and then track. Making a budget is pointless if you never open it. For example, there is $30,000 allotted for marketing spend for the year, but you are spending $10,000 on marketing each month for 4 months in a row. It is easy to see how quickly over drafting can happen.
The Bank Account Lies
Do not use the bank account to determine if the company can afford something. The bank account is lying to you. It’s not telling you about reoccurring charges, the auto payments, the pending transactions, the checks you wrote and haven’t sent yet, the payments you still need to make to get through the month. That is what a bank register is for, it’s a ledger that allows you to track the transactions that have not processed through the bank yet. Every single bookkeeping platform I have ever used has a bank register, you can even go old school and order them from your bank and keep a paper ledger. You can make one in Excel and do it by hand, whatever your method, it is imperative that you track transactions that have not hit the bank. Human error will set in and you will forget about the health insurance payment that is on autopay and end up spending that money causing you to over draft.
Bookkeepers Or Nah
Manage your own bookkeeping or stick very close to the person that does manage it. Do not assume that spending issues are solved by hiring someone to manage the companies books. A bookkeeper can not keep you from overspending, they are there to track what is happening in all of the accounts. In the early days of a company I recommend that entrepreneurs learn how to track their own books. But if you hire, have a lot of clarity around what is happening on those bank registers each month. Ask your bookkeeper to review your profit and loss statement and balance sheet with you periodically and explain what is in each category. Or review the reconciliation reports and ask for explanations on transactions. Not doing this is avoidance. And avoidance is how fraud happens, an employee gets desperate, an entrepreneur gets busy and is ignorant to the process. Plus its your business, your baby, your idea, you should be fully aware of where the money is going each month. You do not need to be an accountant but you certainly should not be blind to the process.
While I recognize money anxiety is a very real thing, proper spending habits can help to lessen the anxiety and get you in front of your bank account rather than behind it. Always remember that money is a servant to your goals, not the master.
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Shiloh Johnson is a long-time CPA and founder of ComplYant, a technology platform offering business owners and entrepreneurs a simple way to manage tax rules and requirements.