Question

Topic: Strategy

Best Practice For A Business Savings Plan

Posted by Anonymous on 12/2/2009 at 1:06 AM ET 125 Points
Is there such a thing as a Business Savings Account? Do companies earn high interest rates as in consumer banking? What are the best practices for businesses to save money and increase cash flow.

We want to save money for future investments for the company. Save for future large purchases, possible buildings. We have percentages set for marketing, payroll, and operations. We then reinvest in marketing, etc. However, how would we save for the future?

Would we carve out a portion from the profits, or take a portion off the top from all sales. Sales revenue, has to come in. But does it make sense taking it from the top, say 3-7% from ALL sales, then follow the fore mentioned percentages, or set aside a certain percentage from the actual profits?

Once the percentage is determine, are there any other means of investing that money moderately? Do we place that money in an investor's hand, or do we keep it in some account earning a small yet safe interest rate? Do we diversify those funds and have the actual money working for the future of the company as well.

I know every state is different, but what are, if any, tax breaks, from doing either one. What do most successful businesses/companies do to earn a tax break regarding savings account.

While I believe that companies primarily succeed with sales revenue, there's got to be another stream of cash flow coming in. I want to know how do we go about reserving and increasing cash flow?

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RESPONSES

  • Posted by Peter (henna gaijin) on 12/2/2009 at 1:40 AM Member
    I think you need to talk to finance experts, not marketing experts... Or at least talk to a bank to ask the questions about business savings accounts.
  • Posted by Inbox_Interactive on 12/2/2009 at 8:12 AM Accepted
    Will, we could easily spend an hour or more talking about this.

    Yes, businesses can open accounts that will earn interest. I don't think the interest is going to be "high" in today's market, but it will be comparable to what consumer accounts earn. Speak to your banker about opening such an account.

    It sounds like you're trying to apply the "pay yourself first" philosophy to your business. This is used by a lot of individual people who are told to save 5-10% of their income BEFORE paying any bills or spending anything. The idea is that if you don't see it, you won't miss it, and you'll learn to live without it.

    I am not sure that's logical in a business, though. Along those lines, let's assess why it is that you're trying to save money.

    If you have specific future plans that will require capital, then you're quite right to save for them. But I think they need to be specific. You need to know that "in 5 years, we'll need $X to do Z." Then you lay out a plan to build up a reserve to have those funds when you need them, and you follow the plan to the extent that your business' cash flow will allow.

    I don't think just saving "X%" a year of your revenue is the best idea, because you don't really know what you're saving for or if you're going to get there. Maybe you still won't have the funds you need, or maybe you'll have saved too much and those funds could have been used elsewhere.

    And silly as it sounds, you can actually have too much money saved in your business.

    Your business is not a mutual fund. It's not designed to generate an income stream from its investments. If your business has so much extra cash on hand that it can't put it to work doing what it's in business to do, then that cash should be given back to the shareholders either by share repurchase or a dividend. The shareholders can then deploy their capital somewhere else.

    As far as where to put your cash while you build up your reserve for your future plans, I would not put it anywhere but in 100% secure investments. You absolutely should not put it with an "investor" other than yourself, and you should not be chasing higher yields or capital gains by buying stocks or other riskier asset classes. You do not want to be in a position where you're 59 months into your 5-year-savings plan, and then the market drops 20% in one week, and you've lost a year's worth of savings -- and you're unable to make the capital investment you had planned.

    I hope this has been of some help.

    - Paul
  • Posted on 12/2/2009 at 4:25 PM Author
    Thanks Paul, I appreciate the detailed feedback. I'm not thinking of the paying myself first philosophy. I know of a couple of small business owners that pay themselves first. They seem to be doing well. I just want to maximum a savings account/goal. My goal is to save enough reserve to purchase our own building, our very own center of excellence. You kindly shared, " I would not put it anywhere but in 100% secure investments" do you have any suggestions.
  • Posted by Ghost Writer on 12/9/2009 at 10:23 AM Accepted
    Once again, we're marketing/communications folks, not financial advisers (at least, I'm not).

    However, as a general rule - the higher the return, the higher the risk and vice-versa. If you want safe, you will get less return on your investment.

    The safest things you can buy are guaranteed investment certificates and government bonds (you will get more from municipal or state bonds than federal ones because the risk of a city or state going bankrupt is higher than the whole nation going down).

    You really need to do research with your banker or financial adviser on potential investments, state laws on how much is protected, etc.
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