What Is A Business Operating Account?

When you set up a startup, managing your finances might not sound that important. Since there are not many transactions processed in the initial stages of a business, people don’t pay much attention to a separate business account. However, that’s a necessity, not just for established organizations, but for every company, including startups.

Every business needs an operating account, which is separate from their personal use, and is mainly designated for business operations, like paying suppliers or accepting customers’ payments. It’s hard to track business transactions when you mix your business and personal accounts. That’s why most businesses have a business operating account for business-related transactions. In this post, we will explore the meaning of business operating accounts, what they are used for, and why your business needs them. Let’s get started.

Overview of Business Operating Account

A business operating account is a checking account, which enables businesses to manage their cash flow while keeping track of expenses. The account allows you to keep your personal and business funds in separate accounts, making it easy to draft the financial statement.

A business can utilize business accounts for managing taxes, handling payrolls, and managing general accounts. The main purpose of having a separate business operating account is to use your capital wisely and monitor your expenditure. It’s also easier to calculate your taxes and distribute payments to your employees effectively.

How is a Business Operating Account Different from a Trust Account?

To better understand the role of operating accounts in handling your day-to-day business expenses, it’s crucial to conduct a comparison between different business operating accounts, so you can get a clear picture of what separates these accounts and which one is your best bet. Let’s start with the difference between a business operating account and a trust account.

As mentioned previously, a business operating account is used for processing business-related transactions, like paying your suppliers, investing in furniture, paying taxes, and depositing money received from clients.

A business trust, on the other hand, consists of property, money, and other resources, which may or may not be related to your business. Simply put, the funds in your operating account are related to your business, while the same in the trust account is not yours. A trust account is not mandatory for all businesses. In fact, most startups and small-scale organizations do not have a trust account.

How is a Business Operating Account Different from a Checking Account?

A business can have an operating account or a checking account. Both might sound similar and are sometimes used interchangeably, but they serve different functions. An operating account is exactly what the name suggests. It helps businesses meet their operating expenses. It can be considered a savings account where the business funds are saved. This not only provides businesses with quick access to money whenever required, but they can save their income in operating accounts to earn interest over time.

A business operating account is mainly used for paying overhead expenses, such as employees’ salaries or the office’s rent. Checking accounts facilitates day-to-day transactions for the business, allowing them to pay for daily expenses, like buying raw materials, getting inventory, etc. The main difference between a business checking and an operating account is that the latter saves money for overhead expenses, while the checking out allows merchants to withdraw cash for routine business transactions.

Note that while each business account listed above serves different functions, it’s not necessary for a business to have all of them. Just one account is sufficient as long as you don’t mix it with your personal accounts. On that note, let’s check out the different types of business operating accounts you can open.

Payroll Checking Account

A payroll checking account is one of the crucial accounts for businesses with multiple employees. If you have more than 10 employees in your organization, it’s advisable to create a separate payroll checking account. It is used for paying your staff on a monthly, weekly, or annual basis. Depositing employees’ wages into their accounts, paying them for overtime, or advance payments are all made from a payroll account. The reason merchants consider having a payroll account is to simplify tracking the employees’ salaries.

Besides that, it’s a comparatively safer way to transfer money to employees’ accounts than using the business’ main checking or operating account. If you pay through the check, your employees can see the account number and other bank details printed on the check. There’s always a risk of a cyberattack if the employee resigns. Having one account dedicated to payroll processing will make managing employee benefits and deductions a whole lot easier.

Merchant Account

A merchant account is a must for all businesses, no matter the size of your company and its operations. It’s for accepting credit/debit card payments and all kinds of digital payments processed through different methods. You cannot withdraw money from this account, nor can you use it as an operating account, since a merchant account is only an intermediary between your business account and the processing company.

When a customer transfers funds, they are deposited into your merchant account. It takes a few days for the funds to show in your main business account. That’s because the payment processor is supposed to verify and approve the transaction to ensure it’s not a fraud. The setup part is done by the payment processor and once the account is activated, you can start accepting debit and credit card payments.

Money Market Accounts

A money market account is like a fixed deposit for a business. It comes with a higher interest and can be linked to your business operating or checking account to facilitate smoother transactions. In other words, a money market account is where a business can deposit funds to accumulate significant interest over time.

The interest rate is relatively higher than the usual savings account. It’s for companies that have large capital with high revenues. You can deposit your money into a money market account if you want to invest securely.

Other than these, a business can have an imprest account, which is used for paying miscellaneous expenses. A small amount of funds are stored in an imprest account to pay for any unexpected expenses, like repairs, maintenance, or equipment replacement.

Tips for Managing Business Operating Account

Creating a business account is one thing and managing it is another. It’s not just for depositing money you receive from your customers and paying salaries to your employees. But it’s a perfect way to manage your finances so that you can keep track of your expenditure, earnings, taxes, income from investments, and so on. Below we have listed a few crucial tips for managing your business operating account.

• Track: Reviewing your financial statements and tracking your income and expenses regularly will help you stay up-to-date with your financial records. This also allows you to avoid delaying a payment or incurring a late fee or other penalties for missing a payment.
• Budget: It goes without saying. You must have a budget in place to avoid overspending. A business operating account is useful only when you do not spend unnecessarily. You can also sort your expenses by different categories to make management easier.
• Have an Accountant: Sure, your accounting software might be an all-in-one system that tracks and manages all account-related operations flawlessly. But that doesn’t always suffice. You should have an in-house accounting expert who can track and audit your accounts regularly. This ensures that any discrepancies are noticed.
• Automate Your Checking Accounts: Writing a check and ensuring that each employee is paid on time can get pretty hectic for a merchant. You can easily focus your attention and time on other core business activities, instead of spending hours processing employees’ payments. It’s advisable to automate these accounts so that your employees’ salaries get deducted from your checking account automatically. You don’t need to interfere or do anything manually. Likewise, you can configure your business accounting software to pay the bills, rent, and other expenses that you incur monthly, automatically.
• Have Separate Business Accounts: While every business requires a separate business and personal account, they don’t necessarily require separate business accounts. Just one checking or operating account will suffice in most cases. However, if you want to organize your finances neatly and get easy access to the funds when needed, you should consider having separate accounts for different business operations, like a checking account for day-to-day transactions, a merchant account for credit/debit card payments, an imprest account to pay for small business expenses and a savings account.

Bottom Line

Having a business operating account is crucial for your business’ success. It helps you identify due payments and expenses and gives you insights into your financial performance. It’s difficult to know whether or not you are meeting your objectives without a separate business operating account. If you are using the same account for personal and business transactions, now is the best time to switch to a separate business account.