MBA2491 Why Every Business Needs a Savings Account

Summary

The $100 MBA Show: MBA2491 Why Every Business Needs a Savings Account

Host: Omar Zenhom
Release Date: July 8, 2024

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Omar Zenhom delves into the critical importance of maintaining a savings account for your business in the episode titled "Why Every Business Needs a Savings Account." Drawing from over two decades of entrepreneurial experience, Omar provides actionable strategies to enhance your business's financial health, emphasizing simplicity and practicality for business owners who may not have a financial background.

Introduction to Business Savings Accounts

Omar begins by highlighting the common practice among businesses of opening a checking or current account to handle daily transactions and revenue. However, he underscores that establishing a separate savings account is equally, if not more, vital for the long-term security and growth of the business.

“This is one of those things that once you do it, it's kind of done. You don't have to do it again, you don't have to think about it again.”
— Omar Zenhom [01:30]

1. Enhancing Financial Security

The foremost advantage of a business savings account is security. Omar shares a harrowing personal experience where his checking account was compromised just before payroll, leading to immense stress and financial uncertainty.

“I started doing this really late in the game. Took me nearly a decade to realize how the small move of creating a savings account for my business can make a huge difference.”
— Omar Zenhom [02:15]

By segregating funds, a savings account serves as a protective barrier against potential fraud or unauthorized access that often targets checking accounts linked to debit cards. Savings accounts typically lack linked debit cards, reducing the vulnerability to online hacking attempts.

2. Budget Management and Financial Discipline

A business savings account enforces budget discipline. Omar explains that by determining how much money is necessary to cover monthly expenses (e.g., payroll, bills), businesses can transfer surplus funds to the savings account. This practice not only safeguards excess revenue but also fosters a conscious spending habit.

“This kind of forces you to stay within your budget or at least be conscious of the fact that, hey, I got more expenses or I added an expense.”
— Omar Zenhom [04:10]

By maintaining a predetermined balance in the checking account, businesses are less likely to overspend, ensuring that operational costs are consistently met without dipping into surplus funds.

3. Building a Rainy Day Fund

Establishing a rainy day fund is another pivotal benefit discussed. Unexpected challenges—such as equipment failures, delayed client payments, or economic downturns—can jeopardize a business's stability. A dedicated savings account provides a financial cushion to navigate these uncertainties without resorting to high-interest loans or emergency funding.

“Having that buffer account allows you to handle these challenges without breaking a sweat, without stressing out.”
— Omar Zenhom [06:05]

4. Capitalizing on Opportunities

Beyond safeguarding against risks, a business savings account positions companies to seize opportunities as they arise. Whether it's acquiring a competitor, expanding into a new market, or launching a fresh product line, having readily available funds accelerates decision-making and execution.

Omar shares insights from his tenure at Webinar Ninja, where having a substantial savings reserve enabled strategic acquisitions that bolstered the company's market position.

“Sometimes it's better to buy out a company that does something really well than to build out that feature yourself.”
— Omar Zenhom [07:45]

5. Determining the Right Savings Amount

Omar advises businesses to aim for a savings buffer equivalent to three to six months of operating expenses. For instance, if a business incurs $10,000 monthly expenses, maintaining a savings reserve between $30,000 and $60,000 is prudent. This benchmark ensures that the business can sustain operations during lean periods without immediate revenue streams.

“A good rule of thumb is to aim for three to six months worth of operating expenses.”
— Omar Zenhom [09:05]

He also encourages starting with manageable savings increments, such as allocating 5-10% of monthly profits to gradually build up the savings account without straining the business's finances.

6. Practical Steps to Open a Business Savings Account

Omar provides a step-by-step guide for establishing a business savings account:

1. Integrate with Existing Banking: When setting up your checking account, simultaneously request a savings account, preferably within the same bank to streamline transfers.

2. Avoid Linked Debit Cards: Choose a savings account without an associated debit card to enhance security.

3. Negotiate Terms: Visiting a bank branch in person can offer opportunities to negotiate better interest rates, especially when depositing significant amounts ($50,000 and above).

4. Leverage Technology: Omar emphasizes the importance of selecting a bank with a robust and user-friendly mobile app, facilitating easy management of funds and transfers.

“One of the things you should consider is their mobile app... you're going to be in this app a lot.”
— Omar Zenhom [10:20]

Conclusion

In wrapping up, Omar reiterates that a business savings account is not merely a financial tool but a strategic asset that can significantly influence a company's resilience and growth trajectory. By implementing the practices discussed, business owners can ensure their enterprises are well-equipped to handle both foreseeable challenges and emergent opportunities.

“Having a savings account can be a really huge benefit to making sure your business can expand, growing, be ready for a rainy day, but also to be protected from scammers. Your future self will thank you.”
— Omar Zenhom [11:30]

Omar concludes by reminding listeners to consult with financial professionals to tailor these strategies to their specific business needs, emphasizing that his guidance stems from personal experience rather than formal financial expertise.

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Key Takeaways:

• Security: Protects excess funds from fraud by segregating them from the primary checking account.
• Budget Discipline: Encourages maintaining operational expenses without dipping into surplus revenue.
• Rainy Day Fund: Provides a financial cushion for unforeseen challenges.
• Opportunity Capitalization: Enables swift action on business growth opportunities.
• Strategic Savings Amount: Aim for three to six months of operating expenses.
• Practical Implementation: Integrate with existing banking, avoid linked debit cards, negotiate terms, and prioritize a strong mobile banking experience.

By adopting these strategies, businesses can fortify their financial foundation, ensuring sustainability and agility in a dynamic market landscape.

Transcript

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[Omar Zenhom]

Heyo. Welcome to the $100 MBA Show. Practical business strategies you can count on. I'm your host, your coach, your teacher, Omar Zenholm. And in today's episode, you will learn why every business needs a savings account. In today's episode, I'm going to give you a strategy that you're going to implement in a couple of hours, maybe less, and it will significantly improve your business's finances and how you deal with your money and cash flow in your business. If you're not a finance person, you're a numbers person. Don't worry. This is actually pretty simple and it's one of those things that once you do it, it's kind of done. You don't have to do it again, you don't have to think about it again. And I'll be honest, I started building businesses about 20 years ago and I started doing this really late in the game. Took me nearly a decade to realize how the small move of creating a savings account for my business can make a huge difference. I'm going to give you all the reasons why you should do this, but any one of these is a good enough reason, especially the first one when it comes to security and keeping your money safe. Let's get into it. Let's get down to business. Before I begin, I want to make this clear. This is not financial advice. I'm not a financial expert. I'm not a financial advisor, I'm not a cpa, I'm not an accountant. You need to speak to a financial expert. I'm just speaking about my experience, what I learned from that experience and sharing that with you. Today, I'm going to share with you all the reasons why you should have a savings account for your business. How to utilize the savings account for your benefit and help the health and growth of your business. But also how best to open a savings account in your business. Most of us, when we start our business, we open up a current account or a checking account. It's one of the first things we do so that we can accept payments and get paid, get revenue. As an established business, this is a huge step because you're starting the psychology of understanding you are not your business. Your business makes the money. You create a business so that it can create wealth for you, and then you get paid from the business. So that's an important step. We have a bank account. We know this. Most of you already have done this already. But why a savings account? Let's get into it. The first thing I want to highlight, which is so, so important, is the security aspects of a savings account. Let's say, for example, you're doing pretty good with your business and you're making pretty good revenue and you're keeping a lot of revenue. You're pretty profitable month over month. And let's say you have a few hundred thousand dollars in the bank, let's say $300,000 if it's sitting in your checking account, in your current account. That current account is often linked to a debit card. Debit cards these days can be used anywhere online. Once your card is created, it is susceptible to fraud even if you don't use the card. Scammers, hackers, whatever you want to call them, they have become so sophisticated these days. And once a card is generated, you are susceptible to getting basically robbed. Yes, the bank can reimburse you and you're protected once you've proven it's fraud. But it's a huge headache, trust me. It's happened to me where my checking account was hacked into via my cards. And guess what? It happened a day before payroll. Bank account drained. I can't tell you how stressful that is. I still have PTSD from that experience. Yes, the bank will cover that problem. But you have a few days where you're in limbo before the bank actually files the paperwork and reimburses you and all that kind of stuff. And in many cases, you're going to have to file a police report. There's a lot going on here. The process is not as fast as when this happens with a credit card, by the way. So what does this have to do with a savings account? Well, a savings account gives you a safe haven to put your cash. Savings account often do not have cards attached to them. And if they do have that option. You can choose not to have one. The easiest way to do this is to have a savings account that is with the same bank as your checking account or your current account, where you are getting paid, where your revenue is coming in. That way you can easily transfer from one account to the next. Yes, you can do this with another bank. Say, for example, your savings account was another bank than your current account. That's fine. But it's a little bit of a headache transferring from one bank to another versus the same bank and seeing it all there in one app. What this does is that any money that you don't need to have on hand goes to the savings account. Now, I'm not talking about a term deposit savings account where you can't touch the money for a certain period of time and the interest rates are quite higher than that. I'm talking about a regular savings account. You have access to the money anytime you want. So as a habit, what you're going to do is move the cash to the savings account so it's protected. There's no card to be hacked. There's. There's no card to be stolen or using brute force. Sometimes they just use brute force, meaning they just use random numbers. They try with an algorithm to discover your card and all the details telling you, these hackers are crazy sophisticated these days. But the point here is that your money is in the savings and for any reason. If you need that cash to pay an expense, a bill, you can easily transfer it from your bank account or the savings account in that bank to your current account, your checking account, to cover that expense. It's instant and it's easy. So benefit number one is security. It's probably the biggest benefit that I would say, and for this reason alone, you should have a savings account for your business. Second, it starts to train you to work within your budget. So when you have a savings account, the first question you have is, how much money do I put in the savings account? Well, that goes back to your P and L. You look at your P and L, your profit and loss sheet, your spreadsheet, and you see, what are my expenses for the month? Okay, my expenses for the month, let's say, are $30,000. And let's say by the end of the month, you have $100,000 in revenue. That means you don't need more than $30,000 in your checking account to pay your expenses, the outgoing bills, payroll, whatever it might be. At any given time, 30,000 should be the max. Everything else should go into the savings account. This is great because this kind of forces you to stay within your budget or at least be conscious of the fact that, hey, I got more expenses or I added an expense, I got added to my P and L. And you feel that expense more than just not having any number to gauge or a certain number of cash sitting in that checking account where your expenses come out of, the next benefit is it's great to have a rainy day fund. Having a savings account allows you to know that if something unexpected happens, equipment breakdowns, clients, delay in payments, sometimes the economy just takes a nosedive and you're just not getting enough revenue as usual. Having that buffer account that saves account allows you to handle these challenges without breaking a sweat, without stressing out, and just merely by having the account, it kind of encourages you to keep putting into it. Why is it encouraging you to do that? Well, you're going to get a return on putting that money in the account. Now, the type of savings account I'm talking about where you have flexibility, taking the money out, it's not going to give you a great rate, a couple of percent, maybe three, four at most at the current time, but that return is going to be calculated monthly. You're going to get a return on that. And as you put more money into the savings, the more and more you're going to get. Even if you have a really bad rate like one and a half percent, you put $300,000 into that account, that's $375 a month of return, $4,500 a year. You're not getting anything with your current account. Now another benefit is having some cash reserves, not just for emergencies, but for seizing opportunities when they arise. Maybe a competitor is selling their business and you have a chance to buy them out, or there's a chance to expand into a new market or a new product line that you want to explore. You've got cash saved up. You can jump on these opportunities without having to scramble for funding. As many of you know, I ran a software company for 10 years, webinar Ninja made multiple seven figures. Over 30,000 users were lucky enough to be acquired by Proprofs. But what I learned in the SaaS world is that sometimes you can make a really strategic move by buying out a small player in your market for a good amount of money. Sometimes there are very niche products that are out in the market that are making pretty good recurring income and they're selling for a hundred, two hundred thousand dollars. Sometimes it's better to buy out a company that does something really well than to build out that feature yourself. It's going to cost you more money and time to do that. You can just buy the company, take their software and integrate it or implement it into your business, into your product. Apple is probably one of the biggest companies that does this. The technology for multitouch, the thing that we do and take for granted on our iPhones and iPads, you know, the pinch and zoom and all that kind of stuff. That technology was developed by another company that Apple acquired. So how much do you save? This is a question I get all the time. A good rule of thumb is to aim for three to six months worth of operating expenses. This means if your operating expenses is, let's say, $10,000 a month, you should aim between 30 and $60,000 in your savings account. Now you might think this sounds like a lot, but remember, it's all about protecting your business and ensuring its longevity. And you could start out small, set aside a percentage of your profits each month, even if it's just 5 or 10%. Over time this will add up and you'll build a healthy savings account without feeling the pinch.

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[Omar Zenhom]

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[Omar Zenhom]

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[Omar Zenhom]

Now how best to open up a business savings account now? If you haven't opened up a bank account for your business yet, and you're about to, then this is a good time to do it. When you open up the checking account or current account, ask them I'd like a savings account as well and request that you do not have a debit card linked to that savings account. A lot of banks do not do this by default, but some do. And if you already have an account most of the time you can do this online where you could just open up the account. But I actually encourage you, whether you don't have a savings account or any accounts at all, to do this in the branch. I know this sounds strange and old school, but you can actually negotiate your savings rate, especially if you are transferring a reasonable amount of money into that savings account immediately. When I say reasonable, I'm talking about something like $50,000 and up. Going to the branch allows you to kind of meet your banker and get things set up right then and there. And of course, this is not financial advice. I'm not a financial advisor. I'm not a financial expert. I'm not a CPA or an accountant of any sort. I'm just sharing my experience and what I learned through that experience. So in conclusion, having a savings account can be a really huge benefit to making sure your business can expand, growing, be ready for a rainy day, but also to be protected from scammers. Your future self will thank you. Thanks so much for listening to the $100 NBA show. If you love what you hear, do us a solid and just follow the show. Click that Follow button, that subscribe button. Whether on Apple Podcasts or Spotify or any podcast app, follow us so that the algorithm knows to give us some love and spread the show. Thanks so much for listening. Before I go, I want to leave you with this. If you're shopping around for which bank is best for you, one of the things you should consider is their mobile app. Look up online. Do a Google search. Which bank has the best mobile app, the most intuitive app, the one that's easy to use, the one that's fast. The reason why I say this is because you're going to be in this app a lot. As a business owner, you want to make sure it's great, it's easy, it's simple. It's not easy for you to make mistakes. And it's something that a lot of people forget to look into when they're choosing a bank. Thanks so much for listening and I'll check you in the next episode. I'll see you then. Take care. And we're back, folks. It looks like Jim from Snails just got in from his client lunch and he's got receipts. His next meeting is in two minutes. The team is asking, can he get through his expenses in that time? He's going for it. Is that his phone? He's snapping a pic. He's texting around. Jim is fast, but this is unheard of. That's it. He's done it. It's unbelievable. On ramp.

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