Everyone likely understands the well-established principle of having a personal savings account to prepare for “a rainy day.” The same principle applies to businesses that should have a business savings account. A business savings account is different from a business checking account in that a business checking account is used for regular transactions such as paying bills and making various purchases while a business savings account is used for storing funds safely.
Benefits of Business Savings
A business savings account offers these benefits:
- To deal with business emergencies. Saved funds should be liquid and accessible to allow appropriate response to unexpected emergencies such as a labor strike, a public protest, a natural disaster, or a sudden downturn.
- To provide a “war chest” to enable dealing with a new competitor or to make a strategic acquisition that will strengthen the company’s market position.
- To replace equipment.
- To capitalize on new business opportunities.
- To provide overdraft protection for your business checking account.
- To protect your money from bank account fraud. Most accounts come with FDIC protection that insures each account up to $250,000.
- To earn interest on your money. That will also help combat inflation.
- To increase your company’s credit rating.
- To strengthen your banking relationship. It can increase your chances of approval for a bank loan.
- To provide a cushion to ensure prompt payment of taxes.
A business savings account can provide a healthy amount of financial liquidity. It is FDIC insured so there is great confidence in the security of the funds. And having an account (or several accounts) is both risk-free and highly cost-effective.
How Much Should You Have Saved?
One of the essential keys to achieving business success is to maintain positive cash flow. Therefore, business savings can be used to make sure that funds are available to deal with any unforeseen cash flow shortages. That way business expenses can be consistently met, and suppliers and employees paid on time.
Answer these two questions to determine how much you can or should put into savings: First, how much cash do you have immediate needs for every month compared to regular cash in-flows? Answering that question will help determine what you can pull out of regular cash in-flows to put into savings without impairing normal operations. Second, what growth stage is your business in? If your business is young, your cash needs may be more demanding and your potential savings amount less flexible than if you’ve been in action for a long time and have stable financial conditions. Your savings amount can also be influenced by your industry, prevailing economic conditions, and your business goals.
A solid guideline for business savings (considering the variables just mentioned), is to have 3-6 months (6 months being obviously a stronger cushion) of the average monthly cash used by the business. Thus, if normal monthly business expenses are $15.000, $45,000-$90,000 should be saved. Considering normal business seasonality, the savings figure should also include the most expensive month in the calculation.
Building a business savings account requires solid planning, good cash flow management, good accounting practices, and consistent financial reviews.
Get Expert Accounting and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.
