I need to start this article by sharing that I’ve been following the business financial principles outlined in Profit First for over 5 years now. I have tweaked the Profit First concept slightly, to make it work for my business. You can hear more about this in CGS Podcast Episode #48 – Applying Profit First to Your Life and Business. You also hear more about bank accounts your business should have.
Whether you’re just starting out in business, or you’ve been in the game awhile, there are certain accounts that all business owners should have set up for their business. These accounts will help you manage the inflow and outflow of money, track profit progress, keep you organized and so much more. I’m breaking down the 5 essential accounts for every business.
5 Bank Accounts Your Business Should Have
#1 Operating Expenses (Checking)
First and foremost, you’ll want an account dedicated to all of the costs associated with running your business. This would be a checking account, since you’ll be paying bills and expenses directly from this account. Following the Profit First model, you’ll have a transfer into this account once or twice a month from your Revenue account. Basically, any income earned through your business doesn’t come into this account directly, it’s transferred in from another account on a specific cadence.
Having an account dedicated to operating expenses for your business helps you avoid going to multiple places to find information about bills and expenses. They all come out of one account. This also makes things easier for your bookkeeper or CPA at tax time. Keeping income and expenses separate makes a world of difference.
#2 Revenue (Checking or Savings)
If you have an account just for expenses, it means you’ll need an account just for revenue and income! This particular account can be either a checking or a savings account. Any time your company sends an invoice, accepts a payment or charges a credit card, the deposit will hit this account. As I mentioned above, and assuming you’re following the Profit First model, you’ll only be making 2 transfers out of this account per month.
Because of that, having this account be a savings account would be just fine. Savings accounts have a maximum withdrawal amount of 6 transfers per month. Since you’ll only be doing 2 transfers, you don’t have to worry about that requirement. My Revenue account is a savings. Although funds aren’t in there for long periods of time (because they’re transferred out 2x per month), I’m still earning more in interest than if this was a checking account.
#3 Taxes (Savings)
One mistake I see business owners making is not saving for taxes throughout the year. Instead, they bank all the funds that come in and deal with the consequences when it’s time to file taxes. Don’t do that to yourself. Your business should have a savings account dedicated specifically to taxes, or saving for taxes throughout the year.
The Profit First model says that when you’re making your transfer out of your Revenue account and into your other accounts, 30% of what’s in your revenue account should be moved to a savings for taxes. When I first started following this model, I couldn’t afford 30%, so I saved what I could. Feel free to do the same. The point is to save for taxes throughout the year, so it’s not such a huge financial hit come tax time.
#4 Profit (Savings)
Another bank account your business should have is an account dedicated to Profit. Your profit would be any money leftover after all expenses and savings takes place. For example, if you’re getting ready to do your transfer out of your Revenue account, you’ll assess what you need for expenses that pay period, you’ll send your specific amount to savings (for taxes and emergencies) and the remaining “extra” is your profit.
Your profit shouldn’t just sit in your Revenue account, otherwise it may be spent. Instead, once you know what your profit is for the period, move it into a savings account. The Profit First model says that every quarter you should take a distribution from the profit account. Half should go to the owner(s) and the other half should be invested. That could be an investment back into the business or directly into the stock market.
If you don’t have profit right now, it’s okay. I was in the same boat for quite some time. However, as my business grew, my profit started to grow as well. Stay hopeful.
#5 Emergency Fund (Savings)
The last of the bank accounts your business should have is an emergency fund, in a savings account. Just like you need an emergency fund for your personal life, your business needs an emergency fund as well. Believe me, businesses aren’t exempt from emergencies! 3-6 months’ worth of business expenses is a great emergency fund amount to have. However, if you need to work up to that, start with 1 month.
Once your business has a fully funded emergency fund, you no longer need to add to it – unless you deplete it. That means more money can be allocated to Profit! Make it a point to get your business’ emergency fund funded as quickly as possible. You’ll be glad you did. I recommend a high yield savings account for this. I personally use Live Oak Bank for my business emergency fund!
Related: 4 Ways to Build Business Credit
Getting a solid financial routine in place for your business is a game changer! It doesn’t matter what stage you’re in, you can benefit from each of the accounts listed above. Have you read Profit First? Do you have similar bank accounts for your business? I’d love to hear your thoughts and questions, so please leave a comment below to share!
-Raya
The CGS Team
