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What Type of Bank Account Should You Have?

What Type of Bank Account Should You Have?

We get this question all the time from new clients and new business owners.  “What bank account should I open?”

We also get this question “I feel like it’s a good idea to have accounts at multiple banks.”

The answers are “it depends” which is the typical accounting answer, but I believe there are a couple of best practices and I will explain why.  Here is our best practice for small business owners on how many accounts they should have and whether they should spread them out over multiple banks.

I am a big believer in the profit first system.  We do it here at Patrick Accounting and it has really helped me to understand even better where our money goes.  We have written a lot about it.  If you are interested in learning more, here is a link to how to implement Profit First in your business.

Income Account
All deposits should go into this account.  It allows you to allocate your money received based on predetermined purposes and be in line with your plan of where your money is supposed to go.  This is following the Profit First model and allows your money to have a purpose instead of commingling.

Profit Account-
The profits account is the money you move first.  The idea behind this is that if you are working off a “I want to make this much money” mindset and work backwards to the amount of money that is in it then it’s easy for you to feel like you only get the leftovers and that’s not what we’re trying to do.  We are not trying to get the leftovers we are trying to get the profits first.  If you do not know where to start, just start with 1% of income.  This will be your Current Allocation Percentage.  Once you can identify the profits amount you are striving to get this would be your target allocation percentage.  You should work toward this goal of the percentage of profit you really are striving to get to. 

Owners Pay Account-
This is your owner’s compensation that is supposed to be your paycheck.  I personally have my personal account linked to my business account and simply have a recurring transfer for my pay on a semi-monthly basis.  I am taxed as a partnership, so this is technically a draw in my world.  If you are an S Corp or C Corp and are taking a real payroll check you probably need to coordinate this payment through your payroll account and not your owners pay account.

Tax Savings Account
I am a big fan of recurring drip type money movement, so either coming up with a weekly number you can draw out of your account or a bi-weekly or a monthly number but make it where you set it and forget it.  This way you do not have to go back and worry about whether you have saved enough for taxes.  You do not want to be in a position where you are putting yourself in a hole so putting that mindset of savings across the board.   If you are using profit first, this should be at your Current Allocation Percentage for Tax.  This auto transfer or drip should be checked for accuracy quarterly.             

I recommend this account not be at your main bank but it should be at a bank with a good mobile platform so you can transfer funds in and out of it via your phone easily.  It should be easy to setup and change the drip, but not super-fast to receive the funds back if you had to in an emergency.

Operations Account
This is a bank account for all expenses except payroll.  This is your main checking account.  It should be at the same bank as your Income Account.  You will allocate a percentage of your income received each week, biweekly, or semi-monthly period to be used to pay for the intended expenses.  This should an intentional percentage of the overall income received.  This will allow you to ensure you are spending truly allocated funds. 

Payroll Account-
This is a slight deviation off the Profit First program, but I believe your payroll account should be separate from your operations account.  For most small business’s payroll is your biggest expenses. If it isn’t your largest it probably is the most important to make sure you are never short.  Allocate your income received to your payroll account on a regular basis. When you run payroll, every cycle confirms the amount you have in the account, transfer over from your operations account any shortfall you have and you will know exactly what you are paying on payroll each period.  This is a great security measure as well as it will ensure that your main operating account isn’t compromised with a high volume of checks going out of it for payroll.  Today’s businesses should require and if you aren’t allowed to require in your state, highly encourage, direct deposit by your employees to improve the efficiency of your payroll and accounting teams in the reconciliation process.

This seems like a lot of accounts and a large hassle, but it is quite simple.  The only account not at your main bank would be the tax savings account.  Remember I said to keep this one on a simple recurring drip or fixed allocation that you review quarterly. The other allocations are three to 4 simple math allocations and it should take less than 5 minutes each transfer to manage this as the percentages are already set.  If you would like to discuss setting up the profit first system for your business please give us a call or schedule a meeting here

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