Accounting & Finance

5 Financial Accounts to Help Manage Your Small Business Finances

As a small business owner, you can face financial challenges whether you're just starting out or have been operating for years. Managing cash flow, keeping up with taxes, and growing your profits are all common concerns that every business owner must grapple with at some point in their journey.

Fortunately, there are a few methods to overcome the financial hurdles in today’s market to ensure profitability and success for your business—no matter what road bumps may arise. In this guide, we'll dive into five financial accounts that small business owners should have to help manage their finances and set them up for long-term sustainability and growth.

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Operating Expenses Account

This is where all business expenses are paid from. The best bank account to use is a business checking account.

For small business owners, an operating expense account is an essential component of the financial management of their organization. This account tracks costs for daily operations ranging from labor to materials and equipment. By separating these costs from all other forms of expenditure and income, small business owners can gain clarity into the financial health of their operations. Operating expense accounts help small business owners understand where their money is being spent in order to create informed decisions about costs and growth opportunities.

Profit Account

Use this account as a rainy day fund and keep 5-6 months of operating expenses. The best bank account to use is a high-yield savings account.

Keeping 5 to 6 months' worth of operating expenses in a profit account can be a major advantage should your business ever encounter hard times. Not only will it cover costs should you experience reduced sales, but it will also provide financial assistance in times of economic downturn. Thanks to this buffer zone, you'll have more peace of mind and security as a business owner.

In addition, having these funds available means you don't have to scramble for capital when trying to expand or update your operations. This can be beneficial if seasonal purchasing options are available or if you need fast access to extra money. If you don't already have an account set aside with several months' worth of operational costs, consider doing so—you won’t regret it!

Tax Reserve Account

This is the account you'll pay your business taxes with. The best bank account to use is a high-yield savings account.

Every business owner needs to plan for their tax payments, and the best way to do that is with a tax reserve account. By setting aside money in this account systematically throughout the year, you can be confident when tax time arrives, and you know you will have enough funds to cover your taxes without having to scramble for cash at the last minute. Keeping track of income and expenses becomes much easier when you are allocating a certain percentage of each transaction directly into your tax savings.

As a general rule of thumb, it is recommended to place at least 30% of your business income aside for taxes. However, tax obligations will vary by business and it is recommended to work with an accountant if you want to be more specific. 

Bonus Tip: Place these funds in a high-yield savings account so that you also benefit from earning interest on them as the funds build up. Making sure to keep up with setting aside money in your tax reserve account is an essential part of responsible financial planning. And it offers significant peace of mind around paying taxes.

Related Reading: How Your Business Structure Impacts Your Taxes

Investment Holding Account

Use this account to store extra profit to buy investments to diversify your revenue streams.

A business owner should consider having an investment holding account to help diversify your revenue streams. Having multiple sources of income can help ensure that if one source fails, there are still other reliable sources to draw from and keep the business afloat. Additionally, a diversified portfolio works together with various income channels to create larger returns than any single channel can provide on its own. 

Owner’s Personal Account

The account you'll use to pay yourself your salary. The best bank account to use is a personal checking account.

Setting up a separate account to pay yourself with is essential to managing a small business. We've said it before, and we will say it again, separating your personal and business finances is key to your business's financial health. When you have a separate account to transfer your salary into, the line between your money and the business's is very clear. Plus, you deserve to pay yourself for the hard work you put into your business!


Types of Banks Accounts for Your Small Business Finances

Let's review the types of bank accounts you might want to consider for these financial accounts. Remember to always separate your personal and business finances, and set up accounts for your personal and business finances.

Related Reading: What to Look for in a Business Bank Account

1. Checking account

A checking account is a type of bank account that allows you to deposit money into the account and withdraw money as needed. Checking accounts typically offer features such as online banking, mobile banking, and direct deposit. With a checking account, it is important to ensure that you have one for your personal and business finances.

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2. Savings account

A savings account is an account commonly used to store additional funds that you don't need immediate access to with a debit card. Typically, you'll want you checking account and savings account through the same bank so you can make seamless transfers from one account to the other.

A high-yield savings account typically has higher interest rates than checking accounts and basic savings accounts, but some can also have more restrictions, such as limits on withdrawals. Similar to your checking account, ensure that you a savings account for your personal and business finances.

4. Certificate of deposit (CD)

A certificate of deposit (CD) is a savings account that offers a higher interest rate in exchange for a longer-term commitment. CDs typically have terms ranging from six months to five years, and the longer the term, the higher the interest rate. If you will need quick access to your money, this account is not the ideal solution for you as there are fees to withdrawal early.

5. Money market account

A money market account is a type of savings account that offers a higher interest rate and usually requires a higher minimum balance than a regular savings account. Money market accounts may also have a monthly fee, limited number of deposits per month, and average daily balance requirements.

Set Your Small Business Up for Financial Success

It is important to have a better understanding of your business's cash flow. By setting up these five financial accounts for your small business you will have more control over your finances. After all, running a successful small business takes financial responsibility and staying on top of your finances is key! Besides, you'll also earn essential insight into understanding how to grow your business faster - and who doesn't like that?

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