Does My Business Need a Savings Account?

As individuals, we are often told having a savings account and contributing to it regularly is part of being smart about money. But business owners are not always told about the benefits of having a savings account for their business.

As with personal savings accounts, there are pros and cons to having a savings account for your business, so let’s talk about some of the reasons why you may or may not want to set up a savings account for your business.

Save Up for Unexpected Expenses

The benefits of businesses having a savings account became glaringly obvious during the pandemic when most businesses were forced to shut down or severely pull back on their operations. Many were unable to pay their bills and were forced to shut down.

The government’s stimulus plan to provide COVID relief to businesses in the form of PPP loans and ERC tax refunds helped but was too late to help many of the small businesses that needed that relief most. If those businesses had maintained and made regular contributions to a business savings account, they might have been able to stay afloat until the relief payments came through.

But unexpected expenses don’t always come in the form of a national disaster. It’s usually something more mundane like a piece of equipment breaking down and needing to be replaced. Or maybe you want to save up for a new space for your business. Having a bank account provides a space for you to put away money until you have enough for your down payment.

Use a Business Savings Account to Even Out Your Income

Many businesses experience what is commonly referred to as feast and famine. This means they have periods where they are very busy and bringing in lots of money (feast) followed by times of little work and little income (famine).

A business that does not plan for the famine can find it hard to get through those times. But a business that puts money into a savings account during the feast can then use that savings to get through the next period of famine.

Use a Business Savings Account to Make Your Money Work for You

When considering a business savings account, it’s important to remember that not all savings accounts are created equal. Most will pay you a small amount of interest on the money in your savings account, but some of those interest rates are so low as to be negligible, while others are high-yield savings accounts, which means they offer a higher interest rate.

A high-yield savings account can be a good way to make the most of your money and help it multiply when you’re not using it. That way you’ll have more money to spend on your business when you need it.

Keep in mind that even a high-yield savings account is a percentage of the amount of money you currently have in your savings account. That means the more you have in your savings account, the more interest you’ll earn on that money.

Minimum Balance Requirement

Most savings accounts, especially high-yield savings accounts, have a minimum balance requirement. This means you need a certain amount of money to go into the account, and if you draw money out of the account to the point where it dips below the minimum balance, you could get penalized with overdraft fees, even when you have money in the account.

So before you open a business savings account, make sure you have enough money for the minimum balance, and that your business is bringing in enough money to ensure you will never need to dip below that minimum balance.

Opportunity Costs

Many businesses don’t keep a lot of cash on hand because, when they do have a lot of funds, they use it to invest in the business so they can continue to grow. They might invest in new equipment, real estate, hiring more staff, etc.

Keeping money in a business savings account can help you ride out the lean times, but it can also prevent your business from growing. That’s not to say you can’t still grow while setting money aside, but it might take longer than it would without the business savings account.

Making these financial decisions for your business is never easy, which is why it can help to have a Bookkeeping Doctor by your side to help you weigh the pros and cons. I can also alert you to the benefits and drawbacks of certain options you may not have been aware of. If you think your business could benefit from having a Bookkeeping Doctor, let’s talk.