Writen by BA White
One of the more practical aspects of running a business is managing cash flow as you're trying to balance the bills, receivables, the business itself etc. Most likely the financial fulcrum of your business is your banking account. This is were money comes in and goes out possibly many times a week or day. Your transactional bank account is a very practical and useful tool and one in which you would expect a fee for service however, you should also expect a return for leaving an amount of cash in a banking account.
Generally this is not the case and the interest rate return you receive on your account is insignificant compared to the account keeping and transaction charges you will incur on your account.
- What can you do to make the money your earn work for you a little more?
- What low risk investments or actions can you take?
This is challenging. Generally financial institutions require you to keep a minimum balance in order to receive what most of us would prefer in a business account:
- No account fees
- No cheque fees
- No transaction fees
- No government duties/taxes
If you're hovering just above the minimum balance and dip below that mark even for one day, you will forfeit the benefits mentioned.
Is there anything you can do? Let's assume the following:
- You don't have the time to monitor your account with such detail to keep it above the minimum
- You accept you generally won't be over the minimum threshold most of the time
- You will be charged the same rate of fees whether you have $1 or $4999 in your account
OK, now calculate the minimum you need in your account to service your bills and expenses. Say for example you need every month, ignoring your credits for now, $1000. Calculate the lowest average balance you have had for the last 6 months, say for example that it is $4,300. Start an internet only based money account which doesn't allow bill payments, cheques, etc and is essentially a savings only account with a much better rate of interest than your transaction account (most likely less than 1%). You should be able to get at least 4% more in a non-transactional savings account.
The philosophy with these accounts is that because they are totally electronic and linked to your transactional account, the financial institution can pass on the savings in infrastructure cost (people, printed media, buildings etc) and pass that on to you in the form of additional interest. Let's assume you get 5% annual percentage rate and fee free internet transactions.
- Now $4300 - $1000 = $3300 of floating cash not earning interest or very little.
- Say you move $3000 into your savings account, leaving $1300 to service your expenses with a $300 buffer.
- Using a simple interest formula, you would receive $3000*0.05/12 = $12.50 in interest per month
This may not match your transactional fees however you are now $12.50 cash better than your previous position. You're working your transactional account with no additional penalty and have commenced your savings/emergency fund which you can add to or withdraw if required.
If you're not comfortable doing these calculations see your financial advisor who can help and of course you would need to keep monitoring you monthly expenses to ensure you are not exceeding your monthly $1000 expenses spend are replenishing your transactional account with at least an amount greater than your expenses each month.
BA White is the author of the book "Getting into business - a shortcut to the truths". This book is available free online at http://www.leverageyoureffort.com
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