MANAGING YOUR BANK ACCOUNT

Businesses often assume that a bank account will manage itself - that is until there is a cash shortage. However, it only takes a few moments to realise that managing the bank account is a very important aspect of the business. Regular attention to detail will aid cash management and planning whilst use of an appropriate account can save money.

GENERAL MATTERS

A proper system of control should include the following points:-

• Regular bank statements (monthly or weekly) which must be reconciled to the cash books.


• Same day banking of receipts.


• Comparing monthly budgeted and actual cash flows; any variances investigated.


• Regular cash forecasting to ensure that negotiated facilities are adequate.


• Preparation of monthly management accounts to confirm the profitability of the business - again compared with budget and variances investigated.


• Ensure all payments are properly authorised, compared to goods received notes and cheques signed in accordance with the banking mandate.


• Close control is maintained over Company credit cards and their use regularly reviewed. Monthly statements reconciled to expense claims.


• Regular meetings with the bank to discuss both progress and to ensure that the most appropriate type of account is in use.

TYPES OF ACCOUNT

There are many different types of account available and banks will often negotiate how its standard tariff of charges will be applied to your accounts.

A business will typically have several needs - all requiring different banking treatment:-

• Working capital ; ie payment of wages, suppliers, collection of trade debts and making loan and interest payments


• Purchase of fixed assets : machinery, motor vehicles or other investments


• Investment of spare cash or set aside money (eg to pay your tax)


• Funding of losses


• Foreign currency transactions


• The traditional current account is only appropriate to the first of the above choices. Usually a business will negotiate an overdraft facility on its current account to meet its working capital needs - but it must always be remembered that overdraft finance is repayable on demand. In theory an overdraft should be fully fluctuating demonstrating its use for working capital rather than loan finance.

Purchase of fixed assets is more long term in nature and should, if possible, be funded through a loan account or even a hire or lease purchase facility - to enable payments to closely follow the use of the equipment. The monthly repayments would, of course, need to be met from the current account.

A good idea is to put aside money each month to pay later large liabilities - such as VAT, tax and dividends - preferably in a special high interest or business premium account; current accounts rarely pay interest on uninvested monies. Alternatively, consider allowing the bank to group this account with an overdrawn account for interest set-off purposes (as borrowing rates are higher than saving rates of interest).

All businesses will need equity or capital investment representing the entrepreneur's stake in the business. This equity can be likened to a buffer which can be used to absorb shocks to the system such as losses. Although the funding of short term losses are traditionally dealt with through a current account, longer term losses will require an equity injection or partial sale of the business, if it is to be continued.

Funds for development are usually a mixture of equity and loans.

FOREIGN CURRENCY

Some businesses have a considerable volume of foreign currency transactions and there are many things which can be done to reduce both transaction times and costs. Firstly, consider using a foreign currency denominated account. Whilst being convenient, it will obviate the need for constant translation costs. Secondly, if the business is long term contract orientated and future funding needs known, consider whether a forward currency contract could be arranged; the main benefit is certainty - ie it then becomes a known cost or receipt.

BANK CHARGES AND OTHER COSTS

Banks have standard tariffs of charges but there are steps which can be taken to keep these costs to a minimum. For example:-

• direct debits or a direct link (eg Autopay) for paying suppliers and staff.


• for individuals: using cash cards and debit cards as opposed to cheques.

Retail businesses have 2 additional options for limiting bank charges:-

• Paying receipts into a bank, such as Girobank, which will negotiate a tailored charge package; or


• Use a Security Company to collect and bank monies centrally - seek quotes asking for the benefits to be demonstrated.

SECURITY & INTEREST

Interest rates charged by banks are a function of their risk assessment and the security offered. Better rates are usually available to well run profitable businesses. This often means that small businesses, particularly, will need to offer a personal guarantee.

It may be possible to limit rises in interest costs by taking out an Interest Cap contract - although there will be a charge for this.

Ways of avoiding the need for guarantees include the injection of further equity or perhaps effecting a factoring or confidential invoice discounting facility which would allows earlier access to debtor receipts (eg 70% when submitted to the finance house) at a cost significantly above normal overdraft costs. Whilst these facilities can be very flexible they should only be considered if the business is profitable and growing.

This article has only sketched an outline of what might be available for a well run business account. All banks will be pleased to consider your needs in greater detail. Accordingly, it is suggested that the bank be asked on a regular basis to consider what it can do for the business.

_ The author, Robert Hewitt is a partner in Gibson Hewitt & Co, Chartered Accountants based in West Byfleet.

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