In part 1 of this “Managing Your MSP’s Money” series, I discussed the importance of understanding cash flow and provided some tips for calculating cash flow, correcting negative cash flow, and putting your cash to work. In Part 2, we’ll talk about how a small or mid-size MSP should go about selecting the right bank.
Taking it to the bank
All of that cashflow that we discussed in the previous article is something that you’ll likely never see as “real” money. Your bank is the guardian of the money that flows into and out of your MSP’s account(s). Depending on the size of your business, you’ll need one or more checking accounts where payments from your customers (whether old-fashioned checks or electronic transfers) can be deposited, and from which you can write checks or transfer funds to pay your company’s bills and taxes and meet payroll.
You may want to have a separate account that pays interest where you can move “extra” money above what’s needed to run the business. You might want to have several “staggered” CDs (that mature at different times). However, there are good reasons not to open more accounts than you absolutely need. Even small fees can add up over time when they’re being charged on several different accounts. In addition, the more accounts you have, the more overhead there is involved in monitoring them to ensure that no accounting mistakes are made by the bank, guard against misuse/theft of your funds (by bank personnel, your own employees, hackers, etc.) and otherwise manage them.
You shouldn’t use separate bank accounts as a substitute for proper accounting practices. That is, you don’t need to have a separate account for capital expenditures, for example. You just create separate accounts within your own bookkeeping system, as you have line items for your budget. It does make sense to have separate accounts in cases where that’s needed for tax purposes, such as for retirement accounts or health savings accounts.
The first step in developing your business banking strategy is to select the right bank. Do you go with the large multi-national bank (such as Bank of America, Chase, Citi, Wells Fargo, etc.) or with a smaller, “hometown” or “community” bank? There are advantages and disadvantages each way. In an economy where there have been 23 U.S. bank failures so far in 2012 as of May 4 (and 92 in 2011), you might feel more secure with one of the “too big to fail” major banks.
On the other hand, you will probably get more personalized service from a smaller community bank. Some banks specialize in small business loans, so if you anticipate needing to borrow money (for example, to expand your business) in the near future, that’s something you’ll want to keep in mind, as well. Also consider what other extra services you might need. Some banks have financial advisors on hand, who can help you to plan investments and manage your money.
Something else to check is what types of fees the bank charges for various services and transactions. If your business will receive a lot of wire transfers from overseas customers, you might want to go with the bank that charges $15 per transfer rather than $30. If you never get wire transfers, that particular fee won’t be important to you. Get lists of the fee schedules for the different banks you’re considering and do a comparison based on your company’s usage patterns.
Most banks today allow you to access your accounts through the web, view your balances and transactions, move money from one account to another, make payments, etc. Some banks don’t have a physical presence in most areas but provide services almost exclusively over the Internet. Because they don’t have the high overhead of maintaining a lot of branch offices, their fees may be lower, interest rates on savings and CDs may be higher, etc.
What you give up with an online-only bank is the face-to-face interaction with bank personnel and you may have a more difficult time getting access to your money. You can’t go down to the bank and confront people if there is an account mix-up or you have a question about your statement. You’ll have to deal with issues over the telephone or Internet, which can be frustrating.
Using multiple banks
Should you spread your banking business across multiple banks? Establishing relationships with two or more banks may provide a “fail-safe” so that you don’t feel as if you have all your eggs in one basket. If a bank does fail, even though your money is insured, it can take a while to get it; with multiple banks you have funds you can access elsewhere.
In the U.S., business bank accounts are protected under FDIC deposit insurance like personal accounts and the same limits apply (currently generally $250,000 as of 2012). So if you have very large amounts of cash, you may need to spread it over different banks to ensure that you don’t go over the limits. If you have both business and personal accounts at the same bank, the limits apply “per entity.” If your business is incorporated or a partnership or LLC, it’s a different entity than you, personally. To find out exactly what types of accounts are insured and how to calculate the limits, click here.
MSPs can grow more quickly than expected – or you might need to expand your offerings in order to snag a particularly lucrative new customer. That usually means you need capital that you might not have. When you need a business loan, you don’t necessarily have to stick with the bank where you have your checking and savings accounts; you can shop around for the best interest rates (although some banks will give preferential rates to their longtime customers).
As with everything, there are drawbacks to dealing with multiple banks. Since terms and fees may differ, it could cost you money if you get the conditions mixed up.
Selecting the right bank for the safekeeping of your MSP’s money is an important decision that’s sometimes made without the amount of thought and research it deserves. All banks are not created equal and there is no one “best” bank for all MSPs. Compare the stability, rates, fees, level of personal service and other factors in light of your own requirements before making a choice.
Once you’ve selected a bank, there are still nuances involved in dealing with the bank that can cost or save your MSP money and/or make the task of overseeing your MSP’s finances easier. We’ll look at those issues in Part 3.