Managing Multiple Bank Accounts for Your Business

Episode 85

When starting a business, one crucial aspect that many entrepreneurs overlook is the management of bank accounts. While it may seem like a mundane topic, understanding how to properly organize and manage your finances can save you from potential legal issues and ensure the smooth operation of your business. Having counseled multiple cleaning company business owners on this I can’t stress it enough. Properly managing your business accounts plays a vital role in maintaining financial stability and compliance.

Managing Bank Accounts for Sales Tax

One of the primary reasons to maintain separate bank accounts is to manage sales tax efficiently. So many cleaning business owners make the mistake of depositing all inflows into a single account. While that is the first place your deposits land, they shouldn’t stay there. Missing this detail has often resulted in a false sense of financial security. However, it’s essential to the longevity of your business to immediately segregate the sales tax from your revenue! Those funds DON’T belong to you. That money ultimately belongs to the government. By setting aside the sales tax in a dedicated account, you avoid the risk of inadvertently using these funds and facing legal consequences for tax evasion.

Managing Bank Accounts for Payroll

In addition to separating sales tax, it’s crucial to allocate funds for payroll and subcontractor payments. Operating with a single account can lead to cash flow issues, especially if anticipated receivables are delayed. By maintaining distinct accounts for payroll and subcontractor payments, you ensure that these critical expenses are covered, even if there are temporary shortfalls in revenue. This approach not only keeps your business running smoothly but also helps in building trust with employees and subcontractors.

Managing Bank Accounts for Payroll

In addition to separating sales tax, it’s crucial to allocate funds for payroll and subcontractor payments. Operating with a single account can lead to cash flow issues, especially if anticipated receivables are delayed. By maintaining distinct accounts for payroll and subcontractor payments, you ensure that these critical expenses are covered, even if there are temporary shortfalls in revenue. This approach not only keeps your business running smoothly but also helps in building trust with employees and subcontractors.

Managing Bank Accounts for Growth

Maintaining a savings account is indispensable for any business, including cleaning companies. This account acts as a financial buffer for expectable and unforeseen expenses, such as legal fees. It also provides your cleaning company the working capital needed for the acquisition of new equipment. By contributing regularly to a savings account, you create a reserve that can be tapped into when expanding your business or during lean periods. Whenever possible, I encourage you NOT to rely on credit cards. The interest paid can completely consume your profits. The simple proactive step of establishing a savings account safeguards your business against financial instability.

Managing Bank Means Consulting with Your Bank

When setting up multiple bank accounts, it’s advisable to consult with your bank about your specific needs. Banks often appreciate when business owners take the initiative to organize their finances and may offer guidance on how to structure your accounts effectively. Starting with minimal deposits to open multiple accounts allows you to gradually build a robust financial system that supports your business operations.

Managing Bank Accounts is Boring

I understand this is NOT the most exciting topic. I urge you to keep in mind that facing financial stress can be considered “exciting”, too. But that’s probably NOT the kind of excitement you want. And while making the sale IS exciting, much of successful entrepreneurship is simply learning good, reliable habits. These habits and the boring steps that prove to be vital to your business growth. By creating separate accounts for sales tax, payroll, subcontractors, and savings, you establish a solid foundation for financial management. When you’re ready to grow and can see that you need help, contact me here. I work regularly with cleaning company owners and inside janitorial staff.
This Week’s Podcast transcript can be found below.

 

00:08 Ray
Joel, we’re back and we are talking about bank accounts. Now, this seems like a pretty dry topic, but you’re giving me that look.

00:15 Joel
Like the desert dry?

00:17 Ray
I did bring a glass of water.

00:19 Joel
This is something that a lot of business owners don’t think about when they first start their business, is having separate business accounts for separate things. Recently in the paper, I I have seen somewhere between four and five people in the cleaning industry over the past, say, six months that have gotten arrested, tried, convicted of sales tax evasion. It does not apply to cleaning companies. It could happen in any industry. But it’s what you do with the money as you collect it, which is so important. And so many business owners put it into one checking account because they want to see that number rise, and they’re all excited when they five, six, seven figures in their bank account, but when really you should be breaking it up into some subcategories. How it works for myself. All my inflows go into an operating account. Once that money has cleared, anything that I take in that has sales tax attached to it, I immediately take that amount of money out from all those invoices and I remove that into a sales tax account so that it sits there and you don’t touch it because that’s the government’s money.

01:29 Joel
You don’t want to mess with the government, because when you mess with the government, they come and knock them.

01:35 Ray
They have no sense of humor about that, Joel.

01:36 Joel
They don’t. They really don’t. So this is one way that you can ensure that they are not going to come and knock them because you are going to pull their money out and set it aside first. Yes. Now, in a lot of cases, our staff members get paid weekly. Out of that operating, you have to pull out the payroll for each week. So you need to make sure that money comes out of there because the people that have to get paid first. Got it. Then I also have subcontractor accounts. Not that I use a lot of them, but early on in my business career, I got some money in. I owed some other bills. I wrote money against money that came in that I owe to another subcontractor. And then guess what happened? Oh, you were a little short. I was a little short because the checks I expected to come in didn’t come in, and I didn’t have the money to pull for the subcontractor. So after that little scare and calling that person and falling on the proverbial sort and saying, I’m sorry, I’ve got 95% of your money. Give me another week and I’ll have the rest.

02:34 Joel
So now when I get a receivable in and I move the sales tax, the next thing I do is I move what money is owed to that subcontractor. It sits in that bank account and that money doesn’t get touched other than to write the check to ABC Company.

02:49 Ray
Smart.

02:49 Joel
And savings accounts. Well, why is that important to a cleaning company?

02:53 Ray
Why is that important to a cleaning company?

02:55 Joel
I’m glad you asked me, Ray. A savings account, you have to put the money aside for several reasons. But there’s a joke that you are not in business until you’ve been sued. At some point, you’re going to have to contact and pay an attorney for something. The other thing that you need to do is you have to have money set aside for payroll when you take on new accounts. Rather than borrowing against a line of credit, having some savings that can be contribute over to pay for that payroll money is important. Then paying it back when you get paid, you take that piece and you put it back into the savings account. The other reason That’s why it’s important is when you start new accounts, you probably need new equipment. Having money that’s being set aside for this new equipment, having a savings account. Obviously, if you’re going to pull money out of there, you have to remember to eventually put money back into it because what happens when you go to the well too many times, it becomes dry and barren like that desert. That is what I’m trying to do is help people out to understand that you don’t want just one bank account.

03:53 Joel
You may break up your money even further than that, but those are probably the key ones that you should have to start.

04:00 Ray
Well, Joel, credit to you. This is a pretty juicy topic. It’s something that’s really easy for any business owner to just stub their toe on that because they didn’t pay attention.

04:10 Joel
When you talk to a bank, if you tell them what you’re trying to do and what you’re trying to set up, they usually will tell you, “Here, put $100 in. You have several accounts, but put $100 into each account just to open it.” Then as the money flows and goes into the account and outflows out, they get it, they see what’s happening, and they appreciate the fact that you’re using the accounts as well.

04:30 Ray
Good advice, Joel. Thank you.

04:32 Joel
You’re welcome.