The multiple bank account system is gaining popularity among business owners due to the easy and intuitive nature of the Profit First model. Ecommerce business owners are well-accustomed to multiple platforms and payment processors that they deal with on a daily basis.
In this article, we’ll dive into the world of multiple bank accounts and show how it compares to the traditional banking system. What’s more, we’ll demonstrate how multiple bank accounts can help ecommerce businesses be profitable while also streamlining their financials and accounting.
Contents:
1. What are the different types of bank accounts that the banking sector offers business owners?
- Business Checking Account
- Business Savings Account
- Business Line of Credit
- Business Investment Account
2. How does online banking with a multiple-account model work?
4. What are the advantages and limitations of multiple bank accounts for ecommerce clients?
5. How does managing multiple bank accounts look in practice for your ecommerce clients?
What are the different types of bank accounts that the banking sector offers business owners?
Banks typically offer several types of accounts for business owners, with each fulfilling a different purpose. Let’s look at some of those accounts.
Business Checking Account
This account is used for day-to-day transactions, such as paying bills, making purchases, and receiving payments. This type of account is used for your accounting data and reconciliation process.
Business Savings Account
A savings account allows businesses to earn interest while building a cash cushion for future needs or emergencies. It’s not a must-have for businesses, especially those just starting out, but it provides a steady pool of money for growth opportunities as well as a safety net.
Business Line of Credit
A line of credit provides businesses with access to a predetermined amount of funds that can be borrowed as needed. Interest is only charged on the amount borrowed. This type of account is a valuable financial option in times of need.
Business Investment Account
This type of account is designed for businesses looking to invest excess cash for potential growth or long-term financial goals. Think of this as your surplus account that can be tapped into for expansion, innovation, and other future-oriented goals.
How does online banking with a multiple-account model work?
The multiple-account model, more commonly known as Profit First, is a cash management methodology that prioritizes profit. Businesses that implement Profit First, set aside a percentage of profit, then determine how much money they can allow for expenses.
The system centers around the idea of literally separating your revenue into different accounts:
- Income Acount: All sales revenue from online stores is initially deposited into this account;
- Profit Account: A certain percentage of the income is allocated to this account, ensuring that profits are set aside first;
- Operating Expenses Account: Another portion of the income is allocated to cover the business’s operating expenses;
- Tax Account: A percentage of the income is set aside to cover future tax obligations;
- Owner’s Pay Account: The remaining funds are allocated for the business owner’s salary or distributions.
By doing this, business owners are forced to intentionally divide their revenue across different bank accounts on a monthly or bi-weekly basis. Profit First provides businesses with a clear financial structure, ensuring that profit is prioritized, expenses are controlled, and taxes and owner’s pay are adequately accounted for.
Written by New York Times Bestselling author Mike Michalowicz, Profit First is utilized by thousands of business owners across a variety of industries, including ecommerce.
What are the problems with the traditional management of bank accounts that your ecommerce clients often face?
Since ecommerce business owners are rooted in the online line of work, traditional banks can present a number of challenges. Let’s review some of the most prominent ones.
- Lack of convenience: Overall, traditional banks don’t have the convenience that neobanks do as you have to visit a physical location for many tasks.
- High maintenance fees: Traditional banks typically charge monthly maintenance fees and minimum balance fees, which can stack up over time, especially if your business needs multiple accounts for Profit First.
- Lack of accounts payable features: Traditional banks don’t offer the same suite of financial products that neobanks do and only some offer a mobile app.
- Poor customer service: It’s well known that traditional banks are hard to get in touch with which can be frustrating when you need to contact your bank.
- Low-interest rates: While having the option of a savings account is a perk, traditional banks offer low-interest rates rather than higher interest rate neobank accounts do.
What are the advantages and limitations of multiple bank accounts for ecommerce clients?
To confidently use the multiple bank account model, ecommerce business owners need to be aware not only of the advantages it gives but also of the possible limitations of this approach. Here are some pros and cons.
Advantages
Multiple bank account management has many advantages for ecommerce business owners, as outlined above. But it’s the combination of multiple bank accounts with the Profit First method that can really streamline financial management and accelerate business growth.
- Greater visibility into cash flow: With separate accounts for income, expenses, profit, and other purposes, ecommerce businesses can have a clearer understanding of their cash flow, making it easier to track and manage finances effectively.
- Ability to implement Profit First: One of the requirements for Profit First is the ability to open multiple checking accounts at your bank. Profit First prioritizes profit allocation, ensuring that businesses set aside profits from the outset. This can lead to improved profitability and financial stability.
Limitations
While each bank will have its own list of fees and conditions, here are the most common ones.
- Account fees and minimum balances: Maintaining multiple bank accounts may incur fees and require minimum balances for each account. Ecommerce clients should consider these costs and choose a bank that offers low or no fees.
- Availability of multiple accounts: Not all banks offer the option of opening multiple accounts, so finding a suitable banking institution that supports this structure may require some research.
How does managing multiple bank accounts look in practice for your ecommerce clients?
Managing multiple bank accounts in practice involves implementing the Profit First system or a similar framework. Ecommerce clients typically follow these steps:
- Set up multiple bank accounts: Open separate accounts for income, profit, operating expenses, taxes, and owner’s pay.
- Allocate funds: After each sales deposit, allocate a predetermined percentage or amount to each account based on the established financial structure.
- Monitor and track: Regularly monitor the balances and transactions in each account to ensure funds are allocated correctly and track the financial health of the business.
- Adjust percentages: Over time, assess your Profit First allocation percentages and make adjustments based on the business’s financial goals and performance.
By following this approach, ecommerce clients can establish a clear financial structure, prioritize profit, and effectively manage their cash flow to support business growth and stability.
Multiple bank accounts: Closing thoughts
Multiple bank accounts can help ecommerce business owners stay in complete control of their cash flow, earmark for taxes, and save. While Profit First is one methodology that utilizes multiple bank accounts, there are others, like the envelope system, that can be used to help you keep your financials organized.
At the end of the day, it’s up to each business to decide what works best to help them gain clarity into their cash flow, expand their business, and become profitable.
