Simplifying Your Small Business Banking: Why You Only Need Two Bank Accounts

June 16, 2023

People tend to think that the more complex something is, the more sophisticated (or just plain better) it is.

Business owners fall into the trap of "more"—more accounts, more strategies, more everything—surely that's a sign of a thriving, mature enterprise, right?

Not so much.

At least, not when creating a solid financial foundation that can grow with your business.

Efficiency and simplicity are two cornerstones of effective financial management. When it comes to banking for your small business, it's about balancing managing your finances effectively and avoiding unnecessary complexity.

The argument we will make in this article is that for most small businesses, two major bank accounts suffice—a revelation that might go against common misconceptions.

Misconceptions About Multiple Bank Accounts for Businesses

We live in a world of more.

More choices, more opportunities, more accounts.

Yet, more isn't necessarily better regarding the number of bank accounts for your business.

There's a common misconception that having multiple bank accounts adds more security or sophistication to your business's financial operations. You reduce risk and gain more control by spreading your funds across various accounts.

Many small business owners feel the need to spread their deposits into various accounts to remain under the $250,000 FDIC insurance coverage.

In light of the crises with Silicon Valley Bank, Signature Bank, and First Republic Bank, many were terrified that their deposits might be available one day and locked up the next. Though these black swan events were highly publicized and worried over, the Federal Deposit Insurance Corporation (FDIC) was there to clean up the mess, and, overwhelmingly, the public has moved on.

Now, new banking products like Meow boast up to $125M of FDIC insurance, which means that as business banking needs and sentiments shift, even giant corporations with complex financial needs can find a single place to store their cash.

Famous financial gurus like Mike Michalowicz, the author of the renowned book "Profit First", suggest that keeping five different accounts can help to simplify your financial life and make your business permanently profitable.

Profit First and related financial management methods are a combination of pop psychology and feel-good financial methods. They work for many small business owners, but most end up in a bigger mess than before.

These methods often act as a shortcut meant to circumvent the real need for excellent accounting and impactful financial reporting.

Multiple bank accounts can lead to increased costs in account fees and the valuable time it takes to manage these accounts. These added complexities ultimately confuse and create a lack of clarity about your financial picture, making managing cash flow and profitability more challenging.

Your business deserves a simple and effective financial foundation.

The Two Essential Accounts: Operating and Savings

When boiled down to the essentials, most small businesses need two primary accounts for efficient operation: an Operating Account and a Savings Account. Let's delve into why these two types of accounts cover most of a small business's financial needs.

The Operating Account

As the name suggests, your business operations occur in the Operating Account.

This is where you'll receive income and pay expenses.

The Operating Account serves as the nerve center of your business's financial activity, allowing you to keep a pulse on the inflow and outflow of cash.

This singular account gives you a holistic, unfragmented view of your business's day-to-day financial operations. This centralized approach to handling finances simplifies management and provides a clear perspective on your cash flow, enabling better-informed business decisions.

The Savings Account

The Savings Account is a separate vessel for your business's retained earnings and reserved funds. This could include income set aside for future investments, emergency funds, or tax liabilities.

A separate Savings Account helps distinguish between funds available for day-to-day operations and those earmarked for specific purposes. It reduces the risk of unintentionally utilizing these reserved funds and assists in better financial planning and forecasting.

These two accounts, an Operating Account and a Savings Account working in harmony, create a streamlined and efficient financial infrastructure for your small business.

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Finding the Balance: Simplicity and Efficiency

The charm of this two-account system lies in its simplicity and efficiency.

By compartmentalizing financial activities into these two main categories, you eliminate the potential chaos and confusion of juggling multiple accounts.

No more moving money from one place to the next, reimbursing yourself for expenses you thought you had available, or trying to remember what that transfer was for three months after it happened.

Simplicity in your financial infrastructure allows for a clear line of sight into your business’s financial activities. It ends the risk of overlooking vital information buried in a complex web of accounts.

The simplicity of this system makes it easier to understand and operate, making you and your team less prone to errors.

Moreover, the Operating Account and Savings Account method promotes efficiency. You can quickly move funds between accounts when needed, manage cash flow more effectively, and precisely understand your financial position at any given moment.

This efficient system allows you to focus more on your core business activities and less on managing a labyrinth of accounts.

A Step Towards Better Financial Management

While the number of accounts you maintain might seem minor, it’s a fundamental aspect of sound financial management.

Embracing a streamlined account structure like the two-account system is a step towards fostering a culture of simplicity and efficiency in your financial operations.

Having a handle on your financial management frees up time and mental resources and improves decision-making. It provides the transparency you need to analyze the financial health of your business accurately and make strategic moves.

In a world that often equates complexity with sophistication, it might seem counterintuitive to suggest that two bank accounts are sufficient for most small businesses.

However, operational efficiency stems from simplicity and a dedication to sound financial management.

The two-account system is not a silver bullet for all financial challenges but an approach that lends itself to clarity, control, and ease of operation.

By adopting this method, you'll embrace a system that prioritizes understanding and managing your financial landscape rather than merely navigating it.

Remember, the goal is not to minimize the number of accounts for its own sake but to create a financial system that supports efficient, transparent, and effective management. Because, at the end of the day, sound financial management is crucial to your business's stability and growth.

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Jeremy Millar
Written by:
Jeremy Millar

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