HOW MANY BANK ACCOUNTS SHOULD MY BUSINESS HAVE? To manage debt and increase business profits and wealth
So, how many should you have?
All businesses are different and have different requirements.
For simplicity less is more. There are many reasons to NOT have multiple bank accounts:
- bank fees
- bookkeeping
- Time
- Multiple credit card accounts
Bank Fees
Some banks charge monthly fees. So having multiple accounts can add up in extra expenses, reducing the profit of your business. To overcome this shop around. There are many banks and credit unions out there wanting your business. There is likely one that suits your needs and doesn’t charge a fee for that service.
Bookkeepers
But bank fees are not the only issue. Bookkeepers typically charge per hour. A bookkeeper will ensure every transaction in your bank account is assigned to an account on profit and loss statement and balance sheet. Having multiple bank accounts adds time and therefore extra charges by the bookkeeper.
Time Consuming
If you are cutting costs, and taking onboard the reconciling of those bank accounts to the correct account, instead of the bookkeeper. Those extra bank accounts will take extra time away from you. Time you could be using on making money for your business or having tools-down time with your friends, family or just simple time out for yourself.
There are reasons that additional bank accounts out way the cost of the bank fees, the bookkeeper or the ‘time’.
Credit Cards
For each trading account it is beneficial to have only one linked credit card account. This will save you costs associated with the fees (usually an annual fee), bookkeeping hours and time.
You can have multiple credit cards for that one credit card account. Which is useful if you want to track a particular employee spending habits.
But there are reasons to HAVE multiple bank accounts:
- Multiple business locations
- Saving accounts
- Payroll
- GST
- Income Tax
- Profit Reserve
- Cash Reserve
Multiple Outlets
It can be useful to track different business ‘outlet’ locations.
If you are a business with several outlet locations, it is useful to track the spending in each location by having a trading account and associated card for each location.
Accounting software does could track these locations via applying different tracking locations to each transaction. However, when the person reconciling the bank account does not have the receipt, invoice, or insider knowledge of which ‘outlet’ the transaction relates, reconciling a sole ‘trading account’ to the correct ‘outlet’ is fraught with problems. So, the profitability of the outlet can be difficult to ascertain without having a trading bank account for each outlet.
Saving Account
It is good practice to have a saving account for multiple reasons. Debt management, material costs, cash reserve, and profit reserve. You could potentially have a ‘savings account’ for each type of reason. But again, you need to outway the cost associated with having multiple accounts. Those costs being bank fees, bookkeeping fees and time.
ATO Debt Management
ATO is one of the largest costs associated with a business. It includes GST, income tax, fringe benefit tax and payroll withholding. An excellent procedure for managing this cost to the business is to move any funds to cover the cost immediately from the ‘trading account’ to the ‘savings account’ as soon as possible.
Payroll Withholding or PAYGW
An example of this is payroll. As soon as payroll is done each period, you pay your employee the net wage. Part of the payroll also includes tax withholding and superannuation. You could potentially transfer the superannuation to the super clearing house and transfer the tax withholding to the ATO at the same time you make payment of the net wage to your employee. Or alternatively you could transfer the tax withholding and superannuation to the ‘savings account’ until such time the cost is due for payment.
GST
Another example is GST. This is always 10% of your turnover that is due to the ATO less GST on expenses. If you don’t know what the GST on the expenses is going to be it is good practice that when you receive money for payment of your product or service that you transfer 1/11th of the funds directly to the ‘savings account’. This ensures that you more than have enough to cover the GST on the BAS. And it’s good practice to keep your spending lower.
If funds are not sitting in the trading account, you will soon adapt and only spend what is there.
Income Tax
So, what about the tax on the business profits. This is something that your accountant can let you know. One way the accountant can assist you with this is by providing you with an estimate of the proportion of turnover to move to the ‘saving account’. Again, transferring the amount as soon as the payment for your product or services is received into the bank account.
Sometimes you may find that you have not transferred a large enough portion of the cash from the sale from the ‘trading account’ to the ‘sales account’. In this instance you will need to increase the proportion of sales to this account.
Profit Reserve
You may find that in relation to the GST and Income Tax that you have moved to much to the ‘savings account’. Great. It’s now time to give yourself a bonus! Or spend the money on a new asset for the business to generate more income.
Having a profit reserve is great practice if you want grow the business or grow your personal wealth but are not sure you can afford it. So, it could be a tactic that when you receive that cash from a sale that you transfer, say 2%, of that sale to the ‘savings account’. At this stage your not sure your business can afford you taking the money. So this is a stepping stone. You are one, taking the money out of the ‘trading account’ and trying to tighten your spending by not seeing the cash available in that account to spend it. And then waiting. Waiting to see if any hiccups occur that mean you need to add the funds back to the ‘trading account’.
Cash Reserve
This profit reserve is something that you should use initially to attempt to fund a cash reserve.
A ‘cash reserve’ is cash in a ‘savings account’ used specifically for expenses to keep the business running. Expenses such as wages, rent, insurance.
All businesses should have a cash reserve. Or assets liquid enough that you can easily get access to in those rainy-day scenarios. Liquid assets are items that can be converted immediately into cash. There is no waiting for the money while you try to sell something.
Seasonal Income
Typically, businesses experience seasonal income and expenses. They are not constant each month. For example, you may have higher sales during Christmas if you are a retailer or lower over Christmas if you are a builder.
A cash reserve lets you even out cash availability over the seasonal periods, by adding surplus sales to the cash receive during the peaks periods and ciphering off cash from the ‘cash reserve’ during low sale periods.
External Influenced
There may be unforeseen external influences that may cause major reductions in income. Covid is a great example of this.
To cope with unforeseen external influences it is a good principle is three to six months of reserves of what you would typically spend on that business during that period.
What is my recommended minimum number of bank accounts
Three.
The ‘trading account’, the ‘associated credit card account’, the ‘savings accounts’. I do not ever recommend skipping the ‘savings account’. You are in business. So be serious about what you do.
If you are trading under a company, you as a director of that company, are responsible for ensuring the business can pay it’s debts when they are due. So the ‘savings account’ is very important and should not be ignored.
Shop around for that ‘savings account’. Why put lots of hard-earned cash into a low interest account.
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