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Why you need more than one business banking account

It’s no secret that having your own business banking account is a critical piece of running a business. It is essential to keep your personal expenses separate from your business not only to add credibility and legitimacy to your business, but a business checking account is also required for any business operated as a separate legal entity from the owner.

A separate bank account also makes small business accounting infinitely easier. I can’t even imagine the headache and strain of trying to sift through my personal account and determine what belongs to the business and what belongs to me. Tax season would be an absolute nightmare!

So yes, it’s not hard to advocate for a business checking account. But have you ever thought about the impact of having multiple bank accounts for the same business?

I was first introduced to this idea from the book “Profit First” by Mike Michalowicz 5 years ago (an amazing read!), and it has changed my life. Yes, you read that right–my LIFE, and I’m not being dramatic. Why? Because with my separate bank accounts, I always have more than enough for taxes, for expenses, for a healthy savings, and to pay myself consistently every month.

I never knew what I was missing!

The problem with having just one business account was that it got really hard to tell what money was devoted to which aspect of my business. I had one lump sum that would fluctuate depending on the time of the month and which expenses or income patterns were happening. I never quite knew how much went toward bills, how much I could pay myself, how much I could pay in taxes (and whether there would be enough), and what portion was technically my savings.

Once I opened up the 5 total bank accounts recommended in Profit First, I had clarity I never knew could exist in my business. I knew exactly what I needed for expenses each month, and it was easy to tell if I was spending too much money in any area. Tax season was no longer a downer–I always had enough to pay up, and it was even exciting to do so because sometimes I had more than I needed and got to put it back into savings! Then of course, it was much easier to build up my 3-6 month savings for an emergency fund, because I saw exactly how much was there. 

I was able to set financial goals with clarity, which meant that by the time the pandemic rolled around, I didn’t have to panic because I had 6 months of savings ready to go. I was able to continue paying my team without going into debt. Talk about financial freedom!

So what does this look like to have multiple accounts? What are they, and how do they operate?

Income Account

The first bank account is my income account. This is the landing place for all of the income my business brings in, then I distribute specific percentages to the other accounts described here on a bimonthly basis.

Operations Expenses Account

This is the account you use to pay your bills, including payroll, insurance, rent, materials, etc. Basically, any check you write or transfer you make to pay someone else, it comes out of this expenses account.

Owners Compensation Account

This is where you keep the money you use to pay yourself each month. You transfer in a certain percentage from the income account, then pay yourself a fixed salary each month based on your average income. This account ensures that you always have enough to pay yourself (assuming you have set your salary correctly). Believe me, that consistent salary feels amazing. 

Tax Account

The tax account is where you transfer the money you will devote to taxes. Instead of being blindsided with paying thousands of dollars in taxes at the end of the quarter or fiscal year, you’ll rest assured knowing the money is already there. You’ll distribute a specific percentage each month from your income account into the tax account, then don’t touch it until it’s time to pay the IRS.

Business Savings Account

Every business needs to have a business savings to cover at least 3-6 months of expenses, including payroll. Without it, you’ll be in a tight pinch if the economy goes south, or if work unexpectedly stops (hello COVID-19). You’ll transfer a specific percentage of your income account into savings each month, then don’t touch it unless there is a dire emergency. If you don’t have the funds yet, be patient as you build them up, knowing that this savings account will bring peace of mind and healthy finances. 

Whatever the size of your business, learning to categorize and physically separate your finances will give you energizing autonomy as a business owner. It’s truly amazing!

If you want to get started and figure out how to make this happen for your business, I would love to show you how! Simply schedule a quick strategy session and I’ll help you figure out what this would look like for your unique business.

Until then,