What is an operating account? Does my small business need it?

Every small business story begins with its financial heartbeat – the operating account. It’s the primary account through which daily transactions pulse, enabling commercial activities to happen without interruption. The idea of an operating account may seem straightforward, yet its role is pivotal for the seamless financial management of your business. In this guide, we’ll look at operating account definition, function, and whether your small business needs one. 

What is an operating account? 

An operating or business operating account is an essential financial tool for companies of all sizes. Its main purpose is to manage the daily transactions that businesses undertake, like paying bills, receiving payments from customers, reimbursing employees for expenses, and handling payroll. 

This type of account is the main depository for cash used in a company’s day-to-day operations, setting it apart from other business accounts such as investment or merchant accounts. Plus, it typically offers more flexibility than personal or savings accounts. 

Does my small business need an operating account? 

Operating accounts aren’t just for large companies. In fact, they’re crucial for small businesses, too. A small business can streamline its financial processes and thus enable efficient and organized cash flow management by having a dedicated operating account. With an operating account, income and expenses can be tracked more easily, reducing the effort needed for accurate bookkeeping and accounting. 

Also, an operating bank account helps a business establish a solid financial foundation, leading to easier access to business credit or loans. Separating personal and business finances helps maintain financial order and serves as a protective measure for legal and tax purposes, ensuring compliance with regulations that require such separations. 

What happens when a small business doesn’t have an operating account? 

Not having an operating account can put a small business at a significant disadvantage. Integrating personal and business finances without one can lead to the following: 

• Organizational chaos and legal complications

• Opens up the risk of personal assets being entangled in business liabilities

• May be perceived as unprofessional if it cannot provide legitimate business payment or receipt options

In the rare scenario of extremely low cash flow or transactions, a sole proprietor may operate without an independent operating account, but this is the exception rather than the rule.

Understanding operating accounts

In a business's financial ecosystem, various accounts serve specific functions, each designed to support different facets of a company’s operation. Let’s look at the nuances and applications of each type of account a small business might use for effective financial management. 

Operating vs. checking account

While an operating account and checking account may share similarities in that they facilitate regular transactions, the operating account goes one step further to cater to specific business needs. Unlike a standard checking account, which is typically used for personal banking, an operating account often includes features beneficial to companies, such as: 

• Higher transaction limits

• The capability to handle multiple currencies

• Enhanced online banking services

• Easier integration with accounting software

A checking account is great for basic operations, but a business operating account is designed for the breadth and complexity of business financial activities. 

Operating vs. trust account

In contrast to an operating account, a trust account is a specialized type of financial repository that holds and manages assets on behalf of a third party, as stipulated by a trust agreement. They’re not intended to be used for day-to-day business transactions. Instead, they ensure funds are used according to specific legal requirements, often relating to the following: 

• Estate planning

• Real estate escrows

• Legal settlements

Operating vs. savings account

Savings accounts are designed to accrue interest over time versus an operating account, making them ideal for holding funds that aren’t needed for immediate transactions. Also, savings accounts typically have transaction limits and don’t offer the same functionality as operating accounts for daily business activities. 

Operating vs. reserve account

A reserve contingency or holding account is meant to set aside a portion of revenue as a financial cushion for future capital requirements or emergency needs. It is an operational safety net, distinguishing it from the working capital within an operating account used for immediate or short-term expenses. 

How to choose and set up an operating account

When running a business, the financial organization is key to long-term success. That’s why selecting and properly setting up an operating account is crucial in business ownership. 

To choose and set up your business operating account, consider the following steps: 

1. Research: Identify banks or financial institutions that offer accounts tailored to business needs. 

2. Compare: Look for competitive fees, interest rates, and additional services like online banking. 

3. Documentation: Gather the necessary business documentation, including EIN or Tax ID and incorporation papers. 

4. Application: Apply for the account online or in person, providing the required information and documentation. 

Managing an operating account

Once you have your new operating account, this is the place where all business transactions – including expenses, revenue, and payroll – are managed, keeping your finances streamlined and accountable. Here’s how to expertly manage your account: 

• Monitor activity regularly: Stay on top of your account by reviewing the transactions daily. This helps to identify any discrepancies or fraudulent activities early on. 

• Maintain a positive balance: Ensure your operating account always has sufficient funds to cover expenses. Overdraft fees can damage your business’s credit reputation. 

• Conduct periodic audits: Regular audits are key to ensuring the integrity of your operating account. They can reveal insights into spending patterns and help in tightening financial controls. 

Your operating account is the beating heart of your business finances. Manage it well, and you’ll build a stable financial health foundation for your small business. 

Operating account FAQs

• What type of account is operating expense?

  An operating expense is typically recorded in the income statement of a business’s financial documentation rather than being associated with any type of bank account. However, the funds to cover operating expenses are usually withdrawn from a company’s operating account. Such expenses are the costs the company incurs for operations to generate revenue, like rent, utilities, payroll, and materials.

• What is an example of an operating account?

  A small business’s primary checking account from which all the daily financial transactions are managed is an example of an operating account. For instance, a retail store’s operating account would be used to pay for inventory, employee salaries, utilities, rent for the shop space, and other day-to-day operational costs.

• Is an operating account a checking account?

  Yes, an operating account is typically a type of checking account that’s designed to handle a high volume of transactions – both deposits and withdrawals – on a regular basis. The key feature of an operating account as a checking account is its liquidity, providing businesses with immediate access to funds for their transactional needs.

• What is the difference between an operating account and a non-operating account?

  The difference between an operating account and a non-operating account lies in their usage. An operating account is used for daily business transactions and operating expenses. In contrast, a non-operating account holds funds used for purposes that aren’t directly related to day-to-day business activities. It’s not typically accessible for regular operations and may have more restrictions or lack the fluidity of an operating account.

Tips for using Expensify effectively with an operating account to track business spend 

Managing business finances requires meticulous tracking of income and expenses, which is where an operating account comes into play. As a central hub for handling daily transactions, an operating account is crucial for businesses to effectively manage their cash flow. 

When paired with a tool like Expensify, businesses can streamline their expense management process, ensuring smooth operations. With Expensify, you can: 

1. Connect Expensify to your operating account, which allows for automatic transaction imports, giving you realtime tracking. 

2. Connect Expensify to your accounting package, which will ensure all of your financial systems and accounts are in sync. 

3. Categorize expenses by assigning expenses to specific categories for better budgeting and reporting. 

4. Set spending limits by using Expensify to enforce spending thresholds for different categories or employees. 

5. Achieve regular reconciliation by reconciling your Expensify reports with your operating account to catch any discrepancies. 

6. Leverage mobile accessibility by encouraging employees to use the Expensify mobile app for on-the-go expense reporting and receipt scanning. 

Manage and track your business expenses the easy way. Give Expensify a try today by filling out the form below, and we’ll take it from there.