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Part One: Book Excerpt

The smart way to manage bank accounts Add to ...

“Taking a strategic approach to managing your cash flow is essential to effectively running your business at any stage,” says the foreword to Cash Management Toolkit for Small & Medium Businesses, written by Jeffrey D. Sherman and published by The Canadian Institute of Chartered Accountants .

Mr. Sherman has more than 20 years of experience as a chief financial officer and with a large chartered bank in various senior roles. He has also been an adjunct professor at York University, creates and presents executive development programs for the Ontario Institute of Chartered Accountants and has written several books.

This is the first of three excerpts from the book that will run today, tomorrow and Wednesday.

A typical small business will have at least three accounts with its primary bank:

  • An operating account (sometimes called a current account) for day-to-day deposits and cheques
  • An interest-bearing account for short-term idle funds
  • A United States dollar chequing account.

In addition, you may have separate accounts for a large payroll (if not paid through a payroll service), cheques issued to consumers or the public, or a high volume of low-value cheques such as rebates. The reason for separate accounts is to isolate errors or frauds to help identify and deal with them quickly.

Depending upon the size of your business and whether you have a full-time bookkeeper, your bank accounts should be reconciled daily or weekly by accessing your bank records online. A formal bank reconciliation may be prepared once a month and duly reviewed by management. Anything that appears as a reconciling item one month should be cleared the following month.

But in addition, online information should be reviewed as often as practicable to detect errors or fraudulent activity quickly, not just at the end of the month. Your financial reporting should never be delayed because the accountant is waiting for the bank statement: the account can be viewed online one day after the end of the month, and there should be no surprises if there is an effective ongoing reconciliation process.

There are many services to help reconcile and provide day-to-day management of the operating account. They add varying degrees of security, assurance and time-saving and, of course, have differing service charges and other requirements. The banks normally call these “cash management” services.

Almost all banking services can now be accessed electronically through web browsers on the Internet. The banks change their offerings frequently, so it is important to routinely review which services you access and how, as well as assess whether some new product is available that provides better or cheaper functionality.

For example, the following lists some typical bank services that can support your cash management:

Automated reconciliation: With your general ledger package, paid items can be downloaded and reconciled automatically in your accounting system. In a variation of this, the bank will track issued and paid items and do the reconciliation for you.

Daily clearing, also called negative pay: Paid cheques are reported daily by electronic capture of critical information and/or cheque images. You notify the bank if any items should not be paid, for example due to alteration, forgery or other fraud.

Positive pay: You advise the bank of cheques that have been released. If a cheque is presented for payment that does not match the information provided, the bank contacts you before paying it. The matching may be based upon serial number and amount, or may be based upon other fields as well such as date and payee.

Electronic funds transfer (EFT), direct deposit, direct debit, preauthorized payments: There are multiple ways to pay employees or suppliers electronically rather than by paper cheque. There will be various different electronic funds transfer products offered, so you will want to review carefully to ensure you have the right one for a particular type of disbursement.

Merchant EFT: Allows you to receive funds by customers paying electronically, rather than by cheque.

Lockbox: Speeds up and automates deposits of mailed cheques from customers.

Deposit services: Co-ordinate and centralize recording of deposits made remotely, at other branches or at other financial institutions.

Cash concentration, mirroring, centralized cash: Provide net balances in different bank accounts so you manage the net balance only (as a net overdraft or to invest).

Credit card services: Not strictly part of your bank account services, but also important, these include both corporate credit cards and merchant credit card services if you accept payments by credit card.

To maintain the relationship, you should meet with your banking team at least once a year. It can be a good opportunity for your staff to get together with the bank staff that they otherwise only communicate with by e-mail or on the phone.

And it provides a forum to consider whether you have the right services given changes that have happened in your business and changes to the bank’s offerings. A meeting is important even if you have a “non-borrowing” relationship.

Tuesday: A small amount of effort can save a lot when you deal in foreign currencies. Look for it on the Your Business home page.

Special to The Globe and Mail

Excerpted from Cash Management Toolkit for Small & Medium Businesses, by Jeffrey D. Sherman, published by The Canadian Institute of Chartered Accountants and sponsored by Canadian Imperial Bank of Commerce. Copyright 2010 The Canadian Institute of Chartered Accountants. For more information on the book, please click here.

For the French version, click here.

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