When it comes to managing your business finances, having the right bank accounts is crucial. Effective financial management is a cornerstone of any successful business. It ensures smooth day-to-day operations and provides a solid foundation for long-term growth.
One crucial aspect of financial management is choosing the right banking product for your individual business’ needs. This guide will explore the roles of business bank accounts and business savings accounts, helping you determine if you need both for your business.
Understanding business current accounts: your daily driver
A business current account is your primary financial tool. It’s where you’ll deposit your income, pay bills and invoices, and manage your day-to-day business transactions.
Here are the main benefits:
- Everyday transactions: Funds are readily available allowing you to easily handle payments, deposits, and withdrawals.
- Allows you to separate your business and personal finances: If you are a limited company, you have a legal requirement to keep your business and personal finances separate. Opening a business current account is an important first step.
- Payroll management: Possibility to streamline payroll processing and direct deposit.
- Integrations with third parties: Some providers have the ability to integrate your business bank account to accounting, expenses, and invoicing software via Open Banking or Open Accounting, potentially saving you time.
But you should also be aware of the limitations:
- Minimal interest: Business current accounts typically offer low interest rates or none at all.
- Potential fees: Depending on your bank, you may incur fees for certain transactions or account maintenance.
- Lengthy set up: Some banks and current account providers have lengthy application times, which is why it’s worth conducting plenty of research to determine which bank is right for you.
Top tip: To help you make an informed decision, you can compare customer reviews of different business current account providers on Trustpilot.
Understanding business savings accounts: the rainy-day fund
A business savings account is like a safety net. It’s a place to set aside extra money for future expenses or emergencies. But it’s also a place where you can invest and see your spare cash grow thanks to higher interest rates available.
The benefits of opening a business savings account:
- Higher interest rates than business current accounts: Business savings accounts often offer higher interest rates than business current accounts. At Recognise Bank, you can earn up to 4.50% AER on your business savings.
- Goal-setting: You can use a savings account to save for specific business goals, such as equipment purchases or expansion.
Limitations:
- Limited access for some account types: If you need quick access to your funds, be aware that some account types, such as Notice and Fixed Term accounts, may have restrictions on withdrawals. These accounts typically only allow withdrawals when you initially open them.
Top tip: Read our helpful guides to Fixed Term accounts and Notice accounts.
Tax requirements: Typically, interest from business savings is subject to income tax. You will be responsible for declaring this income on your annual tax return.
Business current and savings accounts – Do you need both?
The answer depends on your businesses specific needs and whether you have idle funds available which could be earning more interest. For many small businesses, a business current account is sufficient for day-to-day operations. However, if you have surplus funds that you want to grow over time, a business savings account can be a valuable tool.
Here’s a general rule of thumb:
Business current account: For everyday transactions and managing your working capital.
Business savings account: For saving for future expenses, emergencies, or growth opportunities.
How to Effectively Manage Both Accounts
Managing both a business bank account and a savings account can help you balance day-to-day financial needs with long-term growth. Here are some tips for effective management:
- Automated Transfers: Setting up automatic transfers from your business bank account to your savings account based on your cash flow needs. This ensures that surplus funds can earn interest without putting your operational needs at risk.
- Regular Reviews: It can be helpful to regularly review both accounts to ensure the right balance between operational liquidity and long-term savings. This way you can adjust your savings strategy as your business grows or financial needs change.
- Financial Forecasting: Use financial forecasting tools to plan ahead. This can help businesses determine how much cash flow should be kept in the bank account and how much can be safely moved into savings for future growth.
By understanding the differences between business current accounts and business savings accounts, you can make informed decisions about how to manage your business finances.
Explore Recognise Bank’s range of business savings accounts today.
Important information
This content is provided for information only and should not be treated as tailored financial advice for you. Please speak to an independent financial adviser or other financial professional before taking any decisions based on the information provided in this blog. You are responsible for your own financial decisions and neither the author nor Recognise Bank will be responsible for any losses, of whatever kind, that you might suffer as a result of you relying on this post.
