Alisa A. Mitchell CPA PAIf you have accumulated more money in your business checking account than you really need for daily operating expenses, that is a nice problem to have! It’s time to consider putting that money to work. A business savings account might be your answer.
Every bank is different when it comes to the features and benefits of their business offerings. Here is a list of some of the items to consider asking your banker.
- Is your checking account interest-bearing, and if so, how does the interest rate compare to a business savings account interest rate?
- Is there an initial minimum deposit to open the savings account?
- What are the monthly fees for each type of account?
- What minimum balances are required in both checking and savings accounts so that fees are waived? And, is it worth it to keep minimum balances?
- Are there withdrawal limits?
- What are the other benefits of having a business savings account?
- Is my money FDIC-insured, and if so, what is the cap?
Often, a bank will tie the checking and savings accounts together, and there will be a combined minimum balance that is lower than if either account was separate. For that reason, having your checking and savings accounts in the same bank might be more effective. Other common benefits include waiving overdraft fees, wire transfer fees, and NSF charges.
There are other types of interest-bearing accounts besides savings accounts, including money market accounts and certificates of deposits (CDs). Money market accounts may have check-writing privileges, but the withdrawals may be limited. While CDs typically pay a higher interest rate than a savings account, they tie up your money for a specified period of time, and there are steep early-withdrawal penalties.
There are many institutions besides your main bank that are focused on savings accounts and will pay much higher interest rates. Typically, online banks and credit unions will pay a higher interest rate than a bank, but the money may not be FDIC-insured, so be sure to read the fine print.
An additional benefit of keeping money in a separate savings account is that you can save for many things:
- A cushion for emergencies.
- Lump sum tax payments.
- Future capital expenditures.
Once you’ve set up your new savings account, consider setting up monthly automatic transfers from your checking account to your savings account so that you build up your savings balance.
Make sure your business cash works as hard as you do in your new savings account.
As business owners, we’d like to think that we make rational, logical decisions when it comes to our business finances. However, scientists have discovered that we have built-in biases in our brains and our thinking processes, and one of these biases is the sunk cost bias.
A sunk cost is simply money, time, or resources that you have already spent and can’t get back. Another word for them is retrospective costs. The bias comes into the picture when we consider those costs in future decisions.
One example is when you have already invested a lot of time and money in a losing project. You continue to do so even if the benefits are not worth it. Let’s say you have spent a lot on car repairs. You continue to repair the car, digging a deeper and deeper hole. Buying a new car would be the better decision because the benefits would outweigh the costs, but you are still emotionally (and irrationally) attached to all the money you spent on the clunker.
You can also fall into the sunk cost trap with relationships. Let’s say you have an employee that is a borderline performer. You keep investing in them, thinking you can “fix” them, and they don’t improve. You should have fired them a long time ago!
Scientists Daniel Kahneman and Amos Tversky studied cognitive bias, including the sunk cost bias, in case you want to read more about the topic. Kahneman won the Nobel prize for his work.
How can you avoid falling into the sunk cost bias trap? Here are some ideas:
- Be aware that it exists and it affects more of our daily activities than we realize.
- Track key performance indicators regularly so that you can see whether you’re on or off track.
- Detach emotionally, if possible, from your business project.
- Set goals and milestones on your projects and have a “walk away” plan if things spiral out of control.
- Stay future-focused.
Now that you’re aware of sunk cost bias, you can be more mindful when making financial decisions.
Are you looking for new ideas to market your business? If so, knowledge panels might be something to consider. Most people haven’t heard of them, but they are widely used in search results every day.
Knowledge panels are an invention from Google. They are the information panels that appear on the bottom right corner of your search results when you search for certain people or brands. They are different from the business profiles provided by Google Business Profile.
Knowledge panels display information that Google has collected in its Knowledge Graph, which is one of Google’s information databases. Search for your favorite author or your Congressperson, and you will be able to see an example of a knowledge panel. Famous historical figures and extremely popular entertainers may have more of an entire page displaying all of the information about them, but there will typically also be a right column of text (you may have to scroll a bit to see it), which is the knowledge panel.
How can you use knowledge panels in your business? When your leadership or brand is represented by a knowledge panel, it brings instant credibility to your organization. It boosts reputation and helps to build trust with all stakeholders. It increases your firm’s visibility.
Who typically has a knowledge panel? If you are an author of a book that has a formal ISBN (International Standard Book Number), you will automatically get one. If you are a leader of certain organizations, you will also get one. If your brand is well-known, it will have a knowledge panel.
You can’t create a knowledge panel, but you can claim it once it appears. Google determines who receives a knowledge panel. But you can “lobby” for one, and there are marketers you can hire to help you execute the steps it takes to get one. The main thing is to be active and visible online.
If you already have a knowledge panel, there are procedures documented on Google Help that you can follow to claim it. You can also make edit suggestions and submit them to Google. You can’t directly edit your knowledge panel; Google has final control over what is displayed.
Hopefully, you are now more aware of knowledge panels and how they can help your business become more visible.
The equity section of the balance sheet looks different depending on the legal structure of your business. The most common entity types are corporations, partnerships, and sole proprietors. In this article, we’ll take a look at what the equity section of the balance sheet looks like for sole proprietors.
The Equity Section
As a reminder, the balance sheet has three major sections: assets, liabilities, and equity. The equation Assets = Liabilities + Equity is true for all entities. For a sole proprietor, equity is called Owner’s Equity. There are typically two accounts listed: the Owner’s Capital Account and Owner’s Draw Account.
Owner’s Capital Account. This balance represents how much money the owner has put into the business. Also included are cumulative business income or loss amounts from prior years.
Owner’s Draw Account. This balance represents how much money the owner has taken out of the business. Since a sole proprietor does not get a paycheck, taking money out of the business via a draw is how they get their money.
A third account will show up if you run a balance sheet report in your accounting system on any date during the year: Current Year Earnings.
Current Year Earnings. This balance is the same as the net income on the year-to-date income statement. It represents the profit in the business.
On a formal balance sheet for external purposes, only one account will show and that’s the Owner’s Capital Account. The draw and the current year earnings will roll into that account.
Salary vs. Draw
It’s important to distinguish between the idea of a salary and a draw. In corporations, owners receive salaries in the form of paychecks, where payroll taxes are taken out and W-2s are issued at year-end. The salary and taxes are deducted as expenses in the corporation’s income statement. For a sole proprietor, this is not at all how it works.
A sole proprietor has no salary. There is no payroll expense or payroll taxes on the income statement for the owner. The owner could have employees, and those payroll expenses would be shown on the income statement, but there is nothing for the owner.
The owner takes draws, which is not an expense. Draws are a reduction in equity. They do not affect profits. They do not change taxes owed. An owner can take a lot of money out of the business, and there is no impact on profits. There is definitely an impact on cash flow though!
A sole proprietor does pay payroll taxes in the form of self-employment taxes. They simply do it on their IRS Form 1040 as opposed to payroll tax forms that a corporation would use.
The equity section can be the most difficult section to understand on the balance sheet. Hopefully, the explanation above will provide a bit more clarity so you can better understand how to read your business’s financial statements.
Sometimes we just need to slow down. It could be our body telling us it needs a break. It could be our mind experiencing the first signs of burnout. Even if you own your own business, you are subject to burnout, especially if you are a people pleaser or say “yes” to everyone!
But how do we do that? It might have been so long since we’ve changed our pace, we don’t know where to begin. Here are some tips on the best ways to slow down in business.
1. Eliminate wasted time.
Take a deep look at your to-do list. Identify one task that you’ve always done that adds nothing to your business. Does it really need to be done? Try to find tasks that don’t make any sense to do any more that you’re still doing just because you’ve always done it.
You should be able to free up a lot of time! For now, use it to slow down. Take a nap, call a friend, visit your employees with no agenda and really listen, take a walk and smell the roses, or simply hug your child.
2. Get off electronics.
A friend recently suffered from a concussion and her doctor told her to stay off electronics to help her brain heal faster. She limited herself to one hour a day for two months. What would you do if you had to stay off electronics? My friend read all the paperbacks she had that she hadn’t gotten to (for 15 years), cooked more, went shopping for things she had wanted for years, took walks, and learned a new language.
If you spend any time on social media, eliminating it even partially can be a huge pickup in time. Getting off electronics and using that time to get back into nature is healing for everyone.
3. Get enough sleep.
If you are sleep-deprived, everything takes longer. Slowing down and getting enough sleep each night can make you more productive, reducing your work hours. Plus, you just feel more refreshed.
4. Gain a new perspective.
Slowing down your normal routine can help you gain perspective. You might have been fighting fires in the trenches for so long, you’ve forgotten why you’re in business to begin with. Take time to re-connect with your mission, vision, and purpose. Make sure your employees understand their grander goals as well.
5. Avoid multi-tasking.
Almost everyone thinks they are good at multi-tasking, but it turns out science says only a minority percentage of people can really multi-task effectively. Become self-aware of your own habits related to multi-tasking. Do things take longer when you multi-task? Do you make mistakes you have to go back and correct when you multi-task? If so, you may be in the majority of people who simply shouldn’t do it.
6. Stop worrying about billable hours (for service businesses) – at least for a while.
If you are really fixated on billable hours, you may need to just let them go for a while until you can get your perspective back. There is more to life and business than billable hours.
7. Re-connect with your business community.
If there has been no time to connect with your co-owners, customers, and employees, slowing down can provide that time. The most important thing is to simply show up and listen. You will learn a lot!
8. Make time for strategy.
If your business is headed in the wrong direction, that is the ultimate time-waster! Slowing down allows you to re-visit your strategy, making sure you are working on the right projects, that you have the right company culture, and that your business goals are in alignment with your big-picture purpose.
9. Do nothing.
It’s really okay to do nothing when you’re the business owner. You need time to come up with ideas, think about the hard issues, and even daydream. You have to stop working in the business so you can work on the business.
10. Get better at managing distractions.
If you get interrupted every five minutes, you will be drained of energy at the end of your work day. Get smart about managing interruptions so you can be more productive. This will free up more time for you to take breaks and slow your pace during your workday.
Try at least a few of these ideas to slow down before your mind or your body insist on it.