Getting back to basics: setting up bank accounts.

Bank Of Donavan

Today, I wanted to continue with our Back to Basics series. So far, we’ve talked about deciding to be an entrepreneur, choosing a good business idea, and financing the business. At this point, there are so many steps. The order I write any future posts in does not indicated the order in which you should do them for your business.

Now that you’ve got a plan and the money to finance it, you need to start laying the groundwork. Or, to use another metaphor; building a strong foundation on which your small business will stand. This could mean finding a location, finding staff, generating ads, networking in your community…the list goes on. I’ll try to cover as many of these that I can.

Since I’m a bookkeeper, I’m going to cover banking. Many people won’t consider this to be an important step. As long as you’ve got the money, and a way to access it, the finer points are usually ignored. From my experience, doing this carelessly doesn’t usually end in the business collapsing, but it becomes a major frustration.

First and foremost, you’re going to need a separate bank account, credit card, and (if applicable) PayPal or merchant account. Ideally, these are all registered under your business name. However, I know getting a business credit card can be difficult, especially in the beginning. If this isn’t an option, then just start up new personal accounts.

Why is this so important?

Good question. There’s no legal reason you can’t run both personal and business from the same account. If there was, 75% of home business owners would be in jail.

It is extremely difficult to keep these expenses separate. I know what you’re saying;
I’ll keep every receipt, and write a note on each one to allocate them to the proper expense category.

Like any good New Year’s resolution, I’m sure you will…for the first month. After that, you’re inner monologue will sound more like;
Ok, this $300 I spent at WalMart…was that when I bought groceries, the new desk, or when I bought the kids school supplies AND my office supplies?

What should you do?

1. Setup a separate chequing (yep, that’s how we spell it) account.

Take the time to pick a good one, especially if it’s going to be a business account. If this is your first business account, ask around. I’ve found many banks that have great personal banking and terrible business banking, and vice versa. Although my usual advice is to find a way to save money, go ahead and spend a little extra if it means better service. A bad small business account manager can do real damage to your business.

BONUS POINTS: Setup a high interest savings account too. I personally suggest ING Direct. I’ve had one for years, and the no fees thing is a big perk. If you want a little bonus, you can check out the ING link in my sidebar. When you sign up with that number, they’ll give you an extra $25.

2. Setup a separate credit card (optional).

This one comes with some caveats.

The bookkeeper in me will remind you that you only want to do this if you’re going to pay it off in full every month to avoid big interest fees. The small business owner in me realizes this doesn’t always happen. Either way, if you think you’ll need to use a credit card for any business purchases, find a way to open a new one that only gets used for business.

If credit is tight, just get a prepaid card. You US readers have access to those crazy-handy debit Visa cards. I could do a whole post on that…let’s leave it at the fact that we Canadians don’t. Prepaid cards have the benefit that you’re not overextending yourself, since you can only charge what you’ve already added to the card.

3. Setup a PayPal or merchant account (optional).

If you plan on working with customers who want to pay you with a credit card, or just don’t live near you, you’ll need some type of merchant account.

The new business owner will usually default to a PayPal account. The rates are much higher than a proper merchant account, but there aren’t the same credit-check hurdles to jump.

If you have a decent credit rating, talk to your bank about opening a merchant account. You’ll save a lot in service fees.

My advice: Use a PayPal account until you can get a merchant account. If you do any work online, you could keep both accounts. If not, the extra $35/month is an unnecessary expense.

Note to US readers: Your PayPal accounts do a lot more than ours do. We don’t get debit cards, we don't have "Bill Me Later", and it takes much longer to withdraw the money to our accounts. As such, adjust my advice accordingly.

Final thoughts.

I could write several posts about how to maintain this over time. For the sake of brevity, let me just give you a brief summary.

Make sure all your revenue goes into your business accounts first. Make sure all your expenses get paid out of your business accounts. You know that person in front of you at the store, that needs to have their items wrung through in 2 transactions to keep the business items separate? It’s annoying to be behind them, but they’re doing it right.

If you need money, try to pay yourself a flat amount on a regular basis. If possible, avoid paying for personal items with the business account. Also try to avoid pulling small amounts of cash out of the ATM each day. It’s easier to keep track of one $1000 cheque than 50 $20 withdrawals. It’s also a lot easier to overspend when you do it in small doses. I’ve seen too many owners kill their cash flow this way.

That’s it for today’s lesson. I hope you got something out of this. If you have any tips of your own, or if you completely disagree with something, tell me in the comments.