After years of recession and financial struggles, a new report by American Express Open suggests that entrepreneurs and small business owners are confident about their business prospects and on a better path to achieving their long-term goals. Even cash flow issues concerns have fallen to pre-recession levels (49% compared to a high of 66% in 2011) among the 1,150 businesses surveyed. This is all great news, but 49% is still a big number. There are more than 28 million small businesses in the U.S., which means over 13 million of them have cash flow concerns! Even more worrying, 55% of microbusinesses (those with 5 or fewer employees) don’t have enough cash set aside to cover one month’s worth of expenses! Setting up a business savings account is an often-overlooked cushion that offers several benefits:
It can help you stay ahead of cash flow demands
It helps you set aside a percentage of your income to pay your estimated taxes each quarter
The cash invested can bail you out in emergencies and cover unexpected expenses
Finally, opening a business savings account is a great way to build your business credit rating because it demonstrates to banks that you have the means to pay back borrowed capital.
Here are a few best practices for starting and managing a savings plan:
How Much Do You Need To Save?
Most financial planners recommend that individuals and business owners have 3-6 months of savings in place to cover their expenses. It really depends on your personal comfort level, A good rule of thumb is to start small and make it a habit, and then increase it over time. Set a goal for yourself. How much do you want to save and by when? Then budget accordingly.
Compare Business Savings Account Products
Do your research to ensure you’re getting the best interest rates, features, etc. It’s often a good idea to open a savings account with another institution, not your regular bank – it helps establish a clear separation between checking and savings. You can compare rates on business savings accounts from banks and credit unions using this tool from DepositAccounts.com. Don’t get hung up on comparing interest rates, at the end of the day this is not a retirement savings account, it’s rather a source of ready cash, should you need it.
Transfer a Fixed Amount Each Month
A simple and automated way to save is to set-up a regular transfer from your checking account to your savings account. Most savings accounts can be linked to your checking account (even across different financial institutions) making the transfer of cash easy. This can also help eliminate some of the fees that banks charge.
Deposit Your Tax Refunds into the Account
Don’t just blow your tax refund on a vacation or new TV, deposit the funds directly into your business savings account. Think of it this way, a refund isn’t new money; it’s simply cash you’ve already made that’s been handed back to you. Use this “found” money wisely.
Reduce Expenses and Invest the Savings
Reducing your business expenses is a key part of improving cash flow. The less you have going out, the better. If you can afford to, pay the cash that you save into your savings account.
Build Savings into Your Business Budget
Add a line item to your business budget to ensure that you set aside the appropriate funds each month and don’t spend it on other items!
A savings account is a great way to build-up cash reserves, but don’t forget that cash flow management needs to be tackled from many angles –from identifying and fixing the reasons behind your cash flow issues, making the switch to online accounting software, and using tools and apps to manage your cash flow on the road, and more. You can also take advantage of services like Fundbox which offers business owners a simple way to fix their cash flow by advancing payments for outstanding invoices.