Finances for entrepreneurs are complicated from the start and can get more convoluted if best practices aren’t followed. Choosing the correct bank account is vital to seeing long-term success in your business. Here’s what you should know about small business bank accounts and personal accounts.
Small business bank account options
Once you’ve received a federal EIN for your business, a strategic next step would be to open a small business bank account. There are a few different options available for these accounts, and the one you choose will depend on the unique needs of your company.
A few types of small business bank accounts include:
- Business checking account: This account is the most flexible of all bank accounts and will be the easiest way to access funds. With this bank account, you can withdraw money, utilize ATM transactions and complete wire and electronic transfers. Depending on the bank you choose, some business checking accounts can be integrated with your company’s accounting software to effectively manage cash flow.
- Business savings account: A savings account is a great option to use for operating profits your business doesn’t need in the immediate future. With this account, you’ll be able to earn interest on your savings. However, you will have limited access to these funds when compared to the accessibility of a checking account.
- Business certificate of deposit (CD) account: A CD account is a form of savings account that can provide your company with additional profit from interest. However, be cautious about investing operating profits you’ll need for the furtherance of the business. When you use a CD account, you’re agreeing not to take out funds for a certain period of time or you’ll be charged a penalty.
[Read more: Startup 2021: Financing Options for Your Business]
Personal bank accounts
A personal bank account is dedicated to an individual’s personal finances and assets. Personal bank accounts usually have options for checking and saving accounts and operate similarly to business bank accounts. Personal bank accounts can be consolidated to track expenses. Mobile apps and tracking software can also be used to monitor your personal cash flow.
It’s important to get ahead of any lost profits by creating a budget.
Best practices for small business and personal accounts
Never combine business and personal finances
For new entrepreneurs, it may seem harmless to utilize the same account for both business and personal expenses. However, there are drawbacks to merging the two. Combining these finances doesn’t give you an accurate picture of your business’s profits, making it easy to miss important details.
Separating your business and personal finances provides easier tax filing, retains accurate cash flow and gives you the ability to forecast your business’s long-term financial goals. Additionally, if your business is an LLC or a corporation, combining business and personal accounts can cause liability issues that can be avoided with separate accounts.
[Read more: Top Bookkeeping Mistakes New Business Owners Should Avoid]
Track all expenses
If you’re just starting your business, a simple spreadsheet can help keep track of your expenses — from both your business and personal accounts. As your business grows, it may be pertinent to migrate to some more robust accounting software such as Quickbooks or Xero. If you’re not financially savvy, you could hire a bookkeeper or outsource the process to minimize errors and maintain records.
Develop and stick to a budget
As a new business, you may have some unexpected expenses cropping up over time. It’s important to get ahead of any lost profits by creating a budget. Forecast any upcoming expenditures and financial goals, then compare them to your actual revenue and expenses. Update your budget each time your situation changes and have monthly check-ins of your accounts payable and receivable.
[Read more: Financing Strategies for Every Stage of Your Business]
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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