Business Banking Best Practices

 

I had coversation with a client recently focusing on the best way to structure his business banking. It’s a conversation I have a lot, so I figured it made sense to share some best practices. If my clients are wondering it, you probably are too.

First and foremost, DO NOT MIX PERSONAL AND BUSINESS BANK ACTIVITY. There should be a total seperation of church and state here. I know that might sound like more work, but in the end its always more work when actvity is mixed. You’ll need to comb through your books and remove personal activity, and it also makes it difficult to see what’s actually happening with cash flow from business activity. Just don’t do it. You’ll thank me later.

This means you should have dedicated business bank accounts and businss credit cards. If you’re a sole proprietorship, the credit cards can be in your personal name, but just make sure they’re being used only for business. If you’re a corporation, the cards should really be in the name of the business to prevent comingling of personal and business assets, which may pierce the corporate veil and expose you to unnecessary liability.

Now that we have that out of the way, how many accounts should you have? That’s right, accounts. As in plural.
There are multiple ways to do this, and when I consult with business owners we usually have more accounts than what I’m about to outline due to each business’ unique needs, but this is the bare minimum.

Primary Account

First, you’ll want a primary acount. This can be used for all receipts and most expenses. Any cash that is received should go into this account. All other expenses except for the ones I’m about to outline can be paid from this account, too.

Payroll Account

If you have payroll, create a payroll account. This isolates payroll actvity and makes it easy to monitor and reconcile to government reports. How this works is pretty simple. Transfer the amount needed to fund payroll from the primary account into the payroll account, and make the payments from here. If you use a payroll company, have them pull from this acount.

Taxes

If you’re in business you’re probably paying quarterly tax estimates. Save money as you go throughout the year by transfering money from the primary account into the taxes account. Often times it’s a good strategy to dedicate a percentage of sales revenue into this account. Saving along the way lets you know that the money is there and available to pay your quarterly estimates. Meet with us if you’d like to discuss strategies on how to save and how much to be putting aside.

Other

This is kind of a catch all. Maybe your businss has unique expenses. This account can work similar to the tax account where you set a percentage of revenues aside throughout the year. You could have multiple “other” accounts. Maybe you need to buy big pieces of equipment every few years, for example. Figure out what is a reasonable expectation of annualized cost and save as you go.

 

 

At this point we’ve outlined the business banking, but what about your personal expenses? All of this money is still in the business account, and you’re not allowed to touch that for personal use.

This is where regular draws come into play. Business owners should be paying themselves. Often, they’re not on a W2. If that’s the case, you should be taking a reasonable amount of money (maybe a fixed percentage of sales or fixed dollar amount) on a regular basis out of the primary business account and transfering it to your personal account. Far too often, business owners do not take a salary. In fact, somewhere around 30% don’t. That’s crazy. You work hard. Pay yourself.

With the money having been transferred to your personal account, it’s yours to do with as you wish.I’d like to note that there are certain percentages that should be allocated toward all of these areas. Many small businesses, even if they start following these practices, will just be getting organized. And that’s great! Organization is huge in business. However, it’s important to understand how your business is doing, if you’re paying yourself enough, if your expenses are in line with industry standards and where your financial ratios should be for a company your size. You also want to ensure your business is profitable after you’ve paid yourself and all other expenses. More often than not, businesses that are looking to grow can very quickly find areas to focus on to propel themselves forward if they understand these ratios.

If you’d like a complimentary business review to see what’s healthy for you now, what’s not, and how to improve, give us a call.