Why is a Business Bank Account Important?
In our first post, we suggested that one of the things that you should do when you decide to open a new business to get a business bank account. While this would be the ideal situation, it is not always the case and clients sometimes ask the reason to get a dedicated business account, not knowing if the business will be successful. Not only is it recommended, but important to have a separate account for your business.
Separate personal and business accounts to be organized
Being successful and organized sometimes go hand in hand. Having a separate business account makes it much easier to stay organized and allows the business to run much more efficiently. A business needs to track what is coming in (revenues) vs what is going out (expenses). This can more made more difficult with personal transactions also in the mix (was that Krispy Crème business or personal?). Not to mention how much easier it is getting information ready for taxes at the end of the year.
It makes your accountant’s life easier
When a client comes to me using a personal account for their business, I groan on the inside a little. Okay, a lot! Not having a dedicated account for business really complicates how the accounting is done. First, there is no way to truly reconcile the bank account, since all the of the personal expenses would have to be classified as Owners draw/distribution. This is not reality. Instead, accountants have to make monthly journal entries to push these expenses into the accounting system. The same holds true for revenue. Revenue received is classified as revenue but also counted as a draw. This is because the revenue was received but immediately drawn out since there is no business bank account. For those that use cloud accounting software, especially QuickBooks Online (QBO), it takes away the features that make these tools so powerful and, in some cases, force us to do…gasp…data entry! It puts limits on the accounting system.
Accurately tracking cash flow
The ability to properly manage cash flow is vital for any business, and a separate account makes it much easier to assess how the business is performing. Identifying revenue, expenses, and profit is key. Accessing this information quickly can provide a business data on whether the business is meeting its goals or whether adjustments are required. Many key performance indicators (KPI’s) are calculated using these having a separate account helps to ensure the accuracy of data.
Protect the corporate veil
Setting up an LLC for a business protects the owners’ personal assets in the case that the business faces legal issues. Keeping and maintaining separate financials between business and personal keep these protections in place. However, if you do not separate business and personal finances, you can open yourself up to the possibility of being personal liable for business obligations should an issue arise.
They say you should dress for success. In the business world, appearances can make a difference. Regardless of your industry or where you operate, setting up a business account can lend greater credibility to your business, especially when you’re first starting out. If you’re paying vendors with personal checks or unable to accept credit cards because you don’t have a business account, it doesn’t leave a good impression with customers and colleagues.
Getting loans and outside funding
A separate account is also best for when you need a loan. Most institutions require that a business have a separate bank account to qualify for a loan. In addition, having a business account helps a business’ credit rating and worthiness. Using the business debit card on a regular basis creates a credit history for the business, improving their chances of obtaining funding.