Ask an Accountant: Pt 1


How Much Money Should I Keep in the Bank as a Childcare Business Owner?

The Honest Buck Accounting team receives oft-repeated financial questions from our clients, especially during tax season. In this blog series, we tackle some of our clients’ most frequently asked questions pertaining to their Early Childhood Education business finances.

In the following article, we answer the common question, “How much money should I keep in the bank as a childcare business owner?” We also outline several best practices for business savings. Read on to learn more. 

How Much Money to Keep in the Bank

When asked by clients how much money to have readily available in the bank for unforeseen expenses and emergency circumstances, our answer is, “It depends.” During the best of times, such as times of economic stability or seasons of predictability for your business, we recommend having a minimum of three months’ worth of operating expenses in the bank. During uncertain times, such as times of economic recession or periods of change and upheaval for your business, we recommend having a minimum of six months’ worth of operating expenses in the bank. Consider three months’ worth of operating expenses as a minimum benchmark with closer to six months’ worth being the ultimate goal. 

Where to Keep Business Savings

In addition to knowing how much money to keep in the bank, it is important to consider where is the best place to keep your business savings. You want the money to be readily available when you need it. In most cases, we recommend our clients keep their emergency savings in a designated business savings account. In general, you want your cash reserve to be easily accessible, whether it’s physical cash on hand, money in business checking or savings accounts, or assets which take fewer than 90 days to liquidate. You want to avoid relying on funds that are tied up and can’t be used when you need them. A business savings account can be the right option for many, as your funds are kept safe, readily available, and have the opportunity to generate some interest. 

What Best Practices to Observe for Business Savings

Once you know how much money to set aside and where to keep it, you want to be sure to observe some best practices for building and keeping a sufficient cash reserve for your childcare business:

  • Look for funding when your business is in a financially stable position. This practice will allow you to operate from a position of strength and shop around for the best option. Desperation leaves you with fewer options. 
  • Keep the right amount of cash reserved for your business. Too little cash on hand may spell trouble if your business runs into unforeseen expenses or an emergency situation, but too much cash on hand may lead to unwise business spending or an accrual of cash that isn’t working for you. We advise our clients with a surplus of cash on hand to invest in a CD (certificate of deposit) to get a better return on their investment. 
  • Pay attention to FDIC limits. Basically, keep no more than $400,000 per checking account and savings account, total of $800,000 in one banking institution, to stay within FDIC protected limits. 
  • Talk with your accountant to develop a financial forecast, or cash flow projection, for the next twelve months. Your CPA can help you predict income and expenses over the upcoming months, so you can decide together what would be the most appropriate cash buffer for your business. 
  • Work with your accountant on a plan to increase your cash reserve. Your CPA can help you identify areas where you can cut costs. He or she can also show you how to calculate your available cash from a statement of cash flows, so you can anticipate your business’s monthly cash position. 

A sufficient cash reserve is absolutely necessary for building a strong financial foundation for your Early Childhood Education business. The experts at Honest Buck Accounting can help you strategize your cash savings and make the most of your money. Contact us to learn more. 

Read part 2 of the 4-part series!

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