How Many Bank Accounts to Use (#220)
/In this podcast episode, we discuss how many bank accounts to use in an acquired business, and in general. Key points made are noted below.
Identify Costs per Account
One issue is the amount of control that you’ve promised to each of the acquired businesses. If each one is supposed to retain a free-standing accounting department, then there isn’t much you can do. They’re going to need the bank accounts they already have. But let’s assume that’s not the case. Focus on the cost to keep each account open. The bank is either charging a monthly maintenance fee or it imposes a minimum balance requirement. One way or the other, there’s a cost to keeping each account open. To make things simple, I’ll assume it costs $50 to keep an account open for a month, so that’s $600 per year. If you’ve just acquired, let’s call it ten companies, and each one has two accounts open, that’s 20 accounts and they’re costing you $12,000 per year in bank maintenance fees.
That’s not a huge number, but it is a complete waste of money, especially if you plan to consolidate the accounting operations in one place. Let’s assume that the accounting operations will be consolidated. If that’s the case, the usual procedure is to go through the last few bank statements for each of the accounts, figure out what kinds of repetitive transactions are going through them and re-route those transactions to the new centralized account. Then leave the accounts open for a few more months to make sure that you’ve picked up all of the repetitive transactions, and then close the accounts.
This can be a real pain if an acquired company has arranged for all of its customers to send payments to an existing bank lockbox, and there are a lot of customers. In this case, there’s a tradeoff between the effort of contacting all the customers and of eliminating the cost of the lockbox. It’s quite possible that it makes more sense to just leave the lockbox alone and not go through all the grief to save a few dollars in monthly bank fees.
Reduce the Account Complexity
So let’s say you’ve centralized all of the accounting in one place. How many bank accounts should that centralized location have? You might think that the ultimate is to have just one bank account, which handles everything. Maybe not. The problem is that the volume going through just one account can get pretty crazy, which makes it difficult to track. Instead, break the bank accounts down into bite-sized pieces. So have one account that just deals with payroll, so that all the employee direct deposit payments and checks run through that account. And have another account for paying suppliers. And another account just for cash received from customers. And possibly another account just for outbound wire transfers. By taking this approach, it’s easier to keep track of the cash.
Variations on the Concept
But what I’ve just suggested is not necessarily the perfect way to go. There’re lots of variations. For example, what if each subsidiary is actually an independently operated facility, where customers pay with cash or checks on the spot? For example, maybe it’s an office supply store. In this case, each subsidiary needs a bank account so that it can deposit the money locally. Or, what if subsidiaries are in different countries, so they handle different currencies? In this case, the best bet is to initially store the cash in a local bank account and then use a periodic wire transfer to shift the cash into an investment account. However, if there’re restrictions on currency transfers out of the country, then the cash has to be invested locally. But that’s a topic for a different episode on investments.
Control Issues
What about looking at it from the perspective of control? If every location has its own bank account, with local access, then this presents the risk of someone at the local level stealing cash from the account. For example, they could write a check to a friend or a spouse from the account. When going through the due diligence on acquiring a company, if there’s even a hint of fraud, then a good solution is to kill off the account and have the cash flow through a centralized account instead. Then impose really tight controls over that centralized account.
How Accounts Vary with Company Size and Complexity
Another issue is whether the number of bank accounts should increase as a business increases in size. Here are a couple of scenarios. A company only sells goods through an Internet store, and it operates from a single location, with a single distribution warehouse. In short, the operation is simple, and it can expand a lot with just this simple model. In this case, the company could have perhaps just a payables account and a payroll account as it goes from $1 million in sales to $100 million.
Let’s try a different scenario. A company develops a successful retail store operation. Sales per store can only increase just so much, so the company has to keep adding stores in order to increase its sales. Each store has one bank account for the deposit of customer checks, while payroll and suppliers are paid from a central location. In this case, you have one central payroll account, one central payables account, and potentially hundreds of additional accounts, at the rate of one per store.
Or how about this scenario. A company grows to $10 million under one business model involving the sale of computers from an on-line store, but then sales max out. So, it tacks on another strategy of also selling computers through a chain of retail stores. And when those sales stop increasing, it layers on yet another operation, which is sending service people to customer locations to fix their computers. Each of these layers of business strategy has an extra set of bank accounts associated with it, because each one is essentially a separate, free-standing business.
Parting Thoughts
So, in short, there is no ideal number of bank accounts for a business. You have to figure out the optimal number based on how many bank fees you want to pay for, whether or not the accounting operation is centralized, whether operations are in foreign locations, and also on the structure of the business.