Let’s face it banking can be intimidating.  It is even worse when you are a brand new business and need to establish your first bank accounts.  At this stage of the game, you probably have a certificate from the state registering your business and a little bit of capital.  This post will explore how to choose a bank and what types of accounts to set up.

Choosing a bank

Choosing your bank is an important step. Don’t just go with your current bank or a friend’s favorite bank.   You are establishing a long-term relationship, and you should shop around.  I like to look for a national chain bank that has a branch reasonably close to me.  I prefer to do all of my banking online, but occasionally, I need to go to a bank to wire money or establish new accounts.  For me, key criteria include account monthly service fees, online banking fees,  online capability, linking up with QuickBooks, and overall friendliness.  Below, I will suggest you open several accounts, so if the fees for each account are $25, you will lose $100/month in profit to allow a bank to hold your money.  Some banks will waive account service fees for veterans or for maintaining a small balance in the account.  I use Chase Bank for my business needs.  If you search around the web, they usually special offers for new accounts.

Types of accounts for business banking

I recently read Profit First by Mike Michalowicz(Paid).  This is a great book on how to make your business profitable from day 1.  The book recommends the following five accounts:  Income, Owners Compensation, Operating Expenses(OpEx), profit, and Tax.  I have modified the system slightly for a sole-proprietor; here are the five accounts I recommend you have: Income(Checking), OpEx(Checking), Emergency Fund(Savings), Retained Earnings/Profit(Savings), and Petty Cash (Credit Card).

Income Business Account

All of the money coming into your business should go into your income account.  The money is then dispersed from this account to the others listed above.  Every week, you would put a percentage of this money in the opex and retained earnings account.  One exception to this would be owner-paid expenses.  This money would go directly into the opex account. Sign up for our newsletter to receive a guide to estimate your costs.

OpEx Business Account

The opex account is used to hold money to pay for operating expenses.  This is the account you pay your bills out of.  By transferring a percentage from your income account, you naturally take care of the seasonality in your business.  Even if the balance becomes large in this account, don’t take any money out until the beginning of your next profit-making season.  At that time, you can adjust your profit vs. opex ratio.  The balance may be large because you have things like taxes and other semi-yearly expenses stored in your opex account. It is important to overestimate your expenses the first year, i.e., use a larger percentage for the amount you transfer into the opex account.   This will ensure that you have money to cover all of the expenses throughout the year.  In the following years, you can rebalance the percentage to meet the expenses better.  It is also important to note; you will be paying your credit card through this account.

Business Emergency Fund

The emergency fund account is for emergencies.  I would recommend you keep 3-6 months of expenses in your emergency account.  This account should stay fully funded.  If need be, you will take money out of the retained earnings account to start this account and keep it full.  You would also need to add money to this account as savings for major repairs(Capital Expenditures).  For example, air conditioners(A/C) last about 10 years and cost ~$5000.  So you would put $500/year to cover the AC unit.  The 3-6 months additional funds cover you if a world pandemic happens, and you are forced to close for several months.  If the slow season is prolonged, or the A/C breaks at year 7 instead of year 10, your emergency fund will ride you through these times.  It allows you to sleep at night and greatly reduces the risk the business will fail.    What is the right amount in an emergency fund?  It depends on how risk-averse you are and the type of business; I like to keep 3 months of operating expenses plus 1 major repair(~$5000).

Retained Earnings Business Account

This is the best account! It is your profit.  We want to keep this separate so that you can make a conscious choice with the money.  You can use it to put into your personal account as profit/owner draw. Then, you can re-invest it into the business through advertising or equipment; or, you can pay down any business debt.  As mentioned above, you put a pre-determined percentage into this account from the income account.  The great part of this accounting system is that you have your expenses covered in the opex account and your emergencies covered in your emergency fund. This is truly extra money for you and the business.  By using a percentage, you will have money in your retained earnings from your very first sale, instead of waiting until the end of the year and hoping your accountant tells you some money is left for you.

Petty Cash

Your petty cash account is for small purchases from various places.  Gone are the days of writing checks for everything.  This could be a credit card(CC) or a debit card from your opex account.  If it is a credit card, it should be a small credit limit and be paid off each month.  The goal of this account is to provide you with an easy way of making and tracking purchases.  It is not a way to fund your business.  Since the CC is only used for planned purchases, it is paid out of the opex account.  I also use my CC to pay some of my vendors, along with ACH’s from opex.

Isn’t this overcomplicating things a bit?

The bank account system can seem a bit overwhelming; but, it is beneficial.  Here is an example of how this is used.  For simplicity’s sake, let’s say we use a 75% vs. 25% split into the opex and retained earnings account, respectively.  Also assume, we move money once a month on the last day of the month. On the last day of the month, we have $10,000 in our income account.  So, we would move $7500 to our opex account and $2500 to our retained earnings account, leaving $0 in the income account.  So here is what we can tell about last month, we made gross sales of $10,000.  If our opex account balance is going up, we have spent less than we made.  If it is going done month to month, we are spending more than we are making.  This means that our percentages are off, or we are in a predicted slow time of the year.  Our retained earnings account shows how much extra money the business has made.  This is all by looking at your account balances online.  If you back this up with a strong account system, you can easily understand where your business is going.

Remember, if this sounds overly complicated, Relaxing Condos offers business coaching services to get you started with any of your vacation rental business needs.  If you found this useful, please share it on social media using the buttons below. Also, don’t forget to sign up for our monthly Newsletter, Special Hot Tips, and our cost estimating guide delivered to your inbox!

–Jake