If you are a small business owner looking to get funding, then you may be wondering what the average daily balance is and why it matters to lenders. Average daily balance is a key metric that can help you track your business's financial health and performance. So, if you don't know how to calculate your average daily balance or why it is important - this guide is for you!
What is the Definition of Average Daily Balance?
In finance, the average daily balance is the total amount of daily balances in your bank account divided by the number of days in the month. Average daily balance is a common accounting method used to calculate interest fees. If your bank account requires you to maintain a minimum amount each month, they may calculate your average daily balance to ensure you are meeting their account requirements.
Lenders also use the average daily balance to compare business revenue to expenses.
How Is The Average Daily Balance Calculated?
Calculating the average daily balance uses a simple formula that relies on the account balance at the beginning and the end of each day over the course of a month or the duration of your billing cycle.
Let's say that you want to calculate your average daily balance for March for your business bank account. To start, you will look at your daily balances from March 1st - March 31st. Of the 31 days in March, your daily balances were as such:
3 days at $850
5 days at $1,500
10 days at $3,000
13 days at $2,500
Next, let's add all of these daily balances up:
3 x $850 = $2,550
5 x $1,500 = $7,500
10 x $3,000 = $30,000
13 x $2,500 = $32,500
Total March daily balances: $72,550
Now, let's divide that number by 31 to see our average daily balance for March.
$72,550 / 31 = $2,340.
With the above example, this business had an average daily balance of $2,340 for March.
Why is it Important to Maintain Your Average Daily Balance?
As a small business owner, your average daily balance is a key indicator to potential lenders of your business's financial health and stability. Most lenders use your average daily balance in their underwriting process, so if you are looking for access to capital now or in the future, you’ll want to maintain a higher average daily balance. By doing so, your business may have better chances of obtaining funding and a wider net of lenders to look at.
The first step to improving your average daily balance is to know where you currently stand. Start by comparing your last six months of average daily balances to see where your business is currently at.
Set a goal
Once you know where you stand financially, it’s time to set a goal for yourself. If you don’t have a specific goal in mind, aim to increase your average daily balance by a certain percentage each month. Having a concrete goal will help you stay on track and motivated as you work to improve your financial situation.
Make a plan
After you’ve set a goal, it’s time to start making a plan to reach it. This may involve cutting back on unnecessary expenses, automating your savings, or looking for ways to boost your revenue. Whatever route you decide to take, be sure to make a budget and stick to it as closely as possible.
One of the most important things to remember when trying to improve your average daily balance is to stay disciplined. This means following through with your budget and sticking to your savings goals, even when it’s tough. There will be times when you’re tempted to spend money on something that isn’t necessary, but if you can stay disciplined, you’ll be one step closer to improving your business's financial health.
It’s important to remember that Rome wasn’t built in a day, and neither is a healthy bank account balance. If you want to improve your average daily balance, it will take time and effort – but it will be worth it in the end! Be patient as you work towards your goal, and don’t get discouraged if you have a few setbacks along the way.
Seek outside support
If you’re struggling to improve your average daily balance on your own, seek professional help from a financial advisor or planner. They can offer guidance and support as you work towards reaching your financial goals. Our partners at Accion Opportunity Fund offer free 1:1 business coaching on multiple topics, including financial management.
Keep Your Business Finances on the Right Track
So, what is your average daily balance? Understanding this number is one of the most important steps in understanding your business's financial health. You can't make informed decisions about where your company should be going if you don't have a good grasp on where it is right now.
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