Banking

Running a business is going to involve money and banking. You are either receiving money or sending money. Money is invariably going to involve a bank or something like it. Banks are good at making money, but how do you get your banking working for you?

Bank accounts

The most important thing that businesses need from a bank is a bank account. You need one of these to make and receive payments. A bank account settles online payments. It is also used to pay suppliers, tax authorities and (hopefully) profits to owners. Your pay your charge/procurement cards using a bank account.

What type of account do I need?

Generally, the best account for small business banking is a checking or transaction account. It is still useful for your account to have a checkbook facility so you can write checks/cheques. Most of these type of accounts also have a debit card. You use this to make online payments. Look for the debit card to have a Mastercard or Visa logo on it as these have the broadest acceptance.

Fees

Banks always make their money. Your bank account is not excluded from them making money. Payments and deposits you make will attract fees. Get statements emailed rather than delivered through the post to avoid some fees. Fees for electronic payments (both in and out) tend to be less than for paper payments such as cash deposits and checks.

Not all banking need be done in a traditional bank building

Bank reconciliations

Keeping track of your accounts means you need to keep track banking recorded in your accounting system bank account. You bank will also keep track of your account in their accounting system. Having these two records in agreement is an important reality check for your business.

Formal reconciliations

From time to time your bank will send you a copy of their records of your account. This is a bank statement. You need to compare each entry on the statement with your records in your accounting system. As you check each one, you “clear” it, i.e. you have verified it is recorded correctly.

Entries in both your records and on the statement

These are the easiest to deal with. Check to see if the amount recorded is correct and you have allocated it correctly in your accounts.

Entries that are only on the statement

These need to be entered into your accounting system. They could be fees, or deposits made by customers that you were not aware of. If customer deposits are a major part of your business, you can ask them to send you a remittance when they pay you.

Entries that are only in your records

You know about these entries, but the bank doesn’t. This is due to these transactions not yet been “presented” to the bank. A typical example of this are checks you write that remain outstanding. It is important you keep track of these checks by entering them into your accounting system as you write them. You can’t rely on an automated bank feed to tell you about something the bank doesn’t yet know about. The true account balance may be lower than what the bank thinks it is because of unpresented checks.

Another entry that may not appear on a bank statement is uncleared deposits.

Completing the reconciliation

Most accounting systems will present a screen where you can see all transactions for reconciliation, both cleared and uncleared. Enter all transactions on the statement that you where not yet aware of. Clear these transactions. Any remaining uncleared transactions are ones that you are aware of but the bank is not. Do a reality check on these – should they be there? If they are real (eg a check that you wrote), then they should be there. Some of them; however, might be double entries or other mistakes. Remove these. Once your reconciliation consists only of cleared entries and uncleared entries that should be there, you are ready to complete the reconciliation. Your accounting system may have a reconciliation report. Either sign this yourself or have your finance person sign it.

Informal reconciliations

You don’t need to wait for a bank statement to perform reconciliations. You can access bank records of transactions through online facilities. These can be brought into your accounting system as imports or as automated bank feeds. Depending on the volume of transactions, you may wish to import transactions on a daily or weekly basis.

Bank feed transactions may not be “one to one”

A key “gotcha” with bank feeds batched bank transactions that deal with multiple actual payments. An example is a payroll transaction to an outside payroll provider. One withdraw transaction can be for multiple employee net pays. Pension fund payroll payments may be batched in a similar way. Depending on your accounting system, you may need to represent these payments as several payments when the bank only records them as a single payment.

Procurement/credit/charge cards

Procurement cards (or company credit/charge cards) are a way of charging business expenses. You can then pay the card using one monthly payment from your main business bank account. These cards are effective in managing these expenses. In contrast, It is generally more difficult to manage expenses paid privately and then claimed through an expense report. You arrange procurement cards through your bank. It doesn’t have to be the same bank as who you use for your main transaction account. It may be convenient to use the same bank, but shop for the best deals. You can learn more about procurement/credit cards here.

Card rewards

Some procurement cards have reward schemes included as part of the card. These could be points or outright cash rebates. These can be a bonus to your business, but check to see if the annual fee of the card compares with the expected reward benefit to your business.

Loans

Your bank is a source of finance for your business. Business loans are an alternative to funding your business compared with equity (eg issuing shares). Loans; however, must be paid back. When a bank lends, they are concerned about getting their money back. The discussion you have with them will be about security for the bank. The bank will likely require personal guarantees. If you are able to provide additional security – such as your house – you will receive a better interest rate from the bank. It is possible to get loans based on pure business cash flow – but you will pay a premium interest rate for this kind of finance.

Summary

Banks and other financial institutions play an important role in your business. These banking services help you with:

  • your main transaction account with debit cards for online purchases and with checking facilities
  • statements which keep your accounts based in the real world
  • procurement cards to give you better control of expenses
  • loans to help fund your business

Where to next?

Classifying stuff

Stuff you have or owe

Income and expenses

Other information

Guide

Return to Bookkeeping 101 guide homepage

Profit and Tax

Profit: the bottom line

Income tax

Sales tax & GST/VAT