Is It Bad to Run a Business Off the Bank Balance?

The Short Answer

Why Is Spending Based on My Bank Balance a Problem?

You check the balance before you buy. A yearly bill catches you off guard every year. Business and personal money come out of the same account. You have said "but there was plenty last week" more than once.

If a bill you cannot pay is due this month, stop here. That is a Red Flag. Collect what customers owe you, call the creditor about a payment plan, then come back to build the habit.

Why It Happens

Why Do I Have Money in the Bank but Still Run Short?

1. 1

   The balance looks like an answer

   It is only half of one. The other half is what you owe.

2. 2

   Yearly bills are invisible

   Insurance, permits, taxes, and big repairs hide until the week they arrive.

3. 3

   Business and personal money are mixed

   When it all comes out of one account, nobody can tell what belongs to the business.

The cushion is thinner than most owners think. The JPMorgan Chase Institute found the typical small business held only enough cash to cover 27 days of normal outflows. If you are profitable and still short, read profitable but no cash.

Source: Farrell and Wheat, Cash Is King: Flows, Balances, and Buffer Days, JPMorgan Chase Institute, 2016.

Summer cruise visitors drive much of Juneau's private economy, so a bank balance that looks healthy in August can mislead an owner heading into winter. Learn more about planning a business for Alaska.

The Fix

How Much Money Can I Actually Spend From My Business Account?

1. 1

   Pull twelve months of statements

   Circle every bill, especially the ones that come once a quarter or once a year.

2. 2

   Separate the accounts

   If business and personal money share an account, open a business account now.

3. 3

   Build the 90-Day Bill List

   Every bill due in the next 90 days, with the amount and the date. That is your 90-Day Bill List.

4. 4

   Run the Weekly Money Check

   Every Monday: balance, minus the next 30 days of bills, minus this month's set-aside, minus your cushion. See the Weekly Money Check.

5. 5

   Set a purchase limit

   Anything over a set dollar amount waits until you have checked the list.

Worked Example

What Does a Weekly Money Check Look Like?

Take a small landscaping company on the first Monday in March. There is $24,500 in the bank, and the owner is about to buy a $6,000 used mower. Here is the check:

The math: $24,500 minus $17,450 is $7,050. Minus $1,783 is $5,267. Minus $3,000 is $2,267. Only $2,267 of that $24,500 is really free. The mower waits until that number covers it, or until the owner plans for it on purpose.

For Managers

How Do I Track Spending Against a Budget at Work?

Bills and purchase requests often cross your desk first. Keep the 90-Day Bill List current and flag any bill that shows up without being on it. Agree with the owner on your limit: purchases under a set amount you approve after checking the list. Anything over it, and any loan or credit offer, goes to the owner.

To build the full plan, see how to create a small business budget.

For Business Students

What Is the Difference Between Cash Basis Spending and Budget Based Spending?

Cash basis spending decides by what is in the account today. Budget based spending decides by what the plan says is available after known obligations. The Weekly Money Check is a simple short term cash forecast: obligations on one side, today's cash on the other. For a longer view, see the 13-week cash flow forecast.

State loan money still needs a plan. Empire State Development runs a Small Business Revolving Loan Fund, but lenders want projections, not just a healthy bank balance. Owners can start with business plans for New York owners.

Next Step

How Big Should My Cash Cushion Be?

Start with a number you never touch, then grow it. See how much cash reserve a small business needs, and check Fire 12 on the pillar for the full picture.

Checking the bank balance is how many busy North Central Florida owners run their business. The North Central Florida business consultant page shows what to track instead.

Questions

What Else Do Owners Ask About Cash and the Bank Balance?