The financial services sector has an enormous effect on the economy, people, and businesses.
In 2017, the financial services sector accounted for 6.5% of the total economic output in the UK. The sector added £119 billion to the economy and offered 1.1 million employment opportunities.
In the 2016/2017 financial year, the financial services sector remitted £27.3 billion in taxes. In addition to these benefits for the economy, the financial services industry has huge benefits for businesses. Notably, banks are prominent for helping both big and small businesses to thrive and guarantee their success and survival in the long-term.
Through commercial banking, banks have an array of products and services for enterprises ranging from lending money to foreign exchange, basic accounts, investment banking, and payment and transaction payment. Business bank accounts help businesses manage their finances and cater for expenses.
Benefits of Business Accounts
A business bank account is a good idea for any business regardless of size, type, or area of operation.
Whether you have a home-based, online, or brick and mortar business in whichever sector, a business account can offer numerous benefits. These include:
1. Finances management
The primary purpose of a business account is to handle business transactions and related expenses. It helps you manage your business finances and allocate money for different ventures.
With a business account, you can quickly and conveniently cater for expenses such as bills and employee salaries. For instance, if you want to pay a bill, you just write a check, and the amount is debited in your account.
Such convenience is incomparable to reimbursing employees for spending on your business expenses.
2. Establishing a business banking relationship
A business account can help you develop a good relationship with your bank to drive business growth. A business banking relationship may assist you to obtain financing with better terms to expand your business.
You may want a loan to purchase equipment, increase inventory, or buy assets. A good business relationship with your bank makes it easier to obtain other commercial banking products like business credit cards and overdrafts.
3. Financial identification
A business account offers your company financial identification and representation.
Your business is acknowledged as an entity with a financial base. A business account is among the most obvious proof of your business's existence. Also, it adds legitimacy to your business. Suppliers would love to deal with a company with a bank account as it shows stability and good faith. Customers too, especially those who buy online, will trust your business more if it has a bank account.
4. Maintaining professionalism
When you are in business‚ a startup or an established firm—image is everything.
When you write a check or use other payment methods and your name appears, it doesn't help your image. Instead, it conveys a message that your business is a few weeks old.
Having a business account gives your firm a professional appearance and image. When you write a check to your suppliers, they see it's coming from a business. The same applies to your customers; they make payments to your business account, not your personal account, which improves the image of your business. Some customers are reluctant to make payments through a personal account, and hence, a business one becomes handy.
5. Separating personal and business finances
Many people make the mistake of marrying their personal finances and business finances.
They assume that by keeping separate records, they can determine the monies for business and those for personal use. However, in most cases, it does not work, and they end up using business funds for personal expenses, which can be a big blow for any business.
It is best practice to keep personal finances and business finances physically separate in different bank accounts. A business account provides the ability to separate your personal finances from the business ones. Some business owners make a step further to use different banks for business and personal banking to ascertain separation.
6. Organise financial records
Imagine if you mix personal with business finances and it's time to file income tax. How do you determine the monies that are personal and those that belong to your business? It will be a mess that no accountant wants to handle.
However, when you have a business account, you have a clean and accurate record to offer your accountant when income tax time comes. You have a leg up when dealing with HMRC.
Additionally, a business account helps you to determine trends in business—peak and off-peak seasons—and monitor business profitability.
For example, by examining your business account for the past month, you can determine the profitability of your business. If your business earned £7,000 and spent £2,000 on expenses, your net profit is £7,000 - £2,000 = £5,000.
7. Legal reasons
A business bank account guards you against legal issues in the event of problems. When a problem arises in your business, your business account will be examined by relevant authorities.
If you merge your personal and business account, in the event of an issue, your personal finances are affected. A business account protects your personal funds in conflicting situations.
Business Banking Guide
Many businesses have an expense reimbursement strategy to cater for employee expenses. The approach allows businesses to pay back employees for personal money spent on business-related expenses.
Expense reimbursement occurs when employees incur expenses on behalf of the company.
There are three types of employee expense reimbursements, namely:
- Travel and mileage reimbursement: travel reimbursements include expenses like air ticket, meals, accommodation, and cabs that employees incur during business travels. Employees can claim mileage reimbursements if they use their personal vehicles to get to a corporate meeting or event.
- Business expense reimbursement: when employees pay for office supplies or training programs, they are eligible for a refund.
- Healthcare reimbursement: many employers offer employee health benefits whereby an employee is reimbursed for monies spent on treatment and health premiums.
Downsides of Expense Reimbursement Strategy
Finance teams spend loads of time to verify data, process claims, approve them, and reimburse employees. This time can be spent on other profitable and productive tasks.
Firms incur additional labor costs hiring finance professionals to handle the reimbursement process.
Draining on employees
Most employees dislike the process of filing for reimbursement, especially when they just returned from a business trip.
The process of getting a reimbursement is at times lengthy. At times, receipts are lost, and it is tedious and time-consuming to replace them.
Cash flow issues
When employees pay for expenses on behalf of employers, they increase the probability of experiencing cash flow issues.
A research conducted by Conferma titled America's Invisible Bank: The Real Cost to Employees revealed that employees incur approximately £1.43 billion monthly in reimbursable expenses.
38% of respondents claimed to use personal monies to pay for organizational expenses with the average expense being £99.24. This puts a strain on employees, and they lack money for personal expenses. Many employees feel like they act as a bank to their employers.
Most reporting and reimbursement processes are flawed, and delays are common.
Reimbursement delays result in employee dissatisfaction, frustration, and low retention rates. Delays emanate from approval delays and lost receipts. A typical reimbursement takes five weeks, which can have a toll on an employee's finances, including issues paying their bills.
There's a Better Way
Forget the current flawed expenses reimbursement; there's a better way for businesses to cater for employee expenses.
A business account lets you provide for business expenses, including employee expenses—quickly and conveniently without having to waste resources on reconciliation.
A bank can offer a corporate credit card or prepaid debit card that meets employees' expenses beforehand.
For example, rather than using personal monies during a business trip, an employee can charge all costs to a company credit card except incidentals and tips. This is an appropriate approach to expense reimbursement because the credit card bill documents the type of expense incurred without having to preserve receipts and fill out reports.
Alternatively, a business can pay for employee business-related expenses with per diem.
Since a business account comes with a check, a business owner can write a check for the per diem, pre-determined allowance for business-related expenses paid per day. The employee does not have to spend their money. They can use the per diem instead.
Nonetheless, whether your business uses a corporate credit card, cash, or per diem, you have to develop an expense reimbursement policy that stipulates what is catered for and what is not.
For example, if an employee takes his pet to a business trip and charges the hotel pet fee to the company credit card, will that be considered as a misuse of business funds? The expense reimbursement policy should address such a concern, and precisely determine what expenses are reimbursed and which ones are not.
Handling the financials of your business effectively is crucial to establishing a successful enterprise.
This is because accounting is the cement that holds the other departments together. A business bank account can help you manage finances appropriately as well as gain other benefits. It is a better option for paying for expenses as opposed to employees paying for company expenses then being reimbursed.
The process of expense reimbursement is time-consuming, tedious, and delays in reimbursement have negative effects on employees, including dissatisfaction and high turnover rates. Contact Forma for all your accounting needs so that you can concentrate on more profitable tasks.
Business Banking Guide
- How to choose the right account
- Challenger banks
- Starling, Revolt, Tide and Metro bank overview
- How to choose the right account
- Challenger banks
- Starling, Revolt, Tide and Metro bank overview
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Read More Guides below:
What is a use of home allowance?
As a self-employed person, there are two ways to calculating the allowance you can claim for working from home. You can claim a fixed rate of £6 per week, or a proportion of household costs used by the business. Further information is available on our resource on the use of home allowance.
Can I expense Parties (or staff entertainment)?
As a limited company director, you can can claim for the costs of hosting a staff party, as long as the following conditions apply:
- Your cost per pax shouldn't exceed £150 (including VAT). Your employees may invite a partner, and if they do, your total budget for an employee and an additional guest will be £300.
- The main purpose of the event is to entertain your staff members. As such, most of the event attendees should be your employees.
Do note that the per pax budget of £150 applies across the year, so you can claim for several staff events as long as the costs fall within the budget. You can claim this expense even if you're the sole employee in your business.
As a sole trader, you're not considered an employee. As such, you can't claim the costs unless you have employees.
Can I expense Social Media Ads or Marketing Costs?
Yes, you can claim the costs of social media ads as a deductible expense.
How do I open business bank account?
The process for opening a business bank account will vary, depending on the bank you choose to open an account with.
Certain banks may require an in-person meeting, while others may require just an online registration to complete the sign up (we tested out several challenger banks, and found Revolut and Tide to have the smoothest account opening process).
In general, you'll need to prepare the following documents for the sign up:
- Proof of ID
- Proof of address
You may also need to provide the following information about your company:
- Full business address
- Contact details
- Companies House registration number (for limited companies and partnerships)
- Estimated annual turnover
- You may be required to show proof of your personal financial situation, and provide documents to show you have a clean credit history
Why are expenses important?
Expenses are important as you can claim them against your revenue, which helps to reduce the amount of tax you need to pay.
Can I expense general travel expenses?
General travel expenses can't be claimed as a deductible business expense. You can only claim for travel-related expenses as long as the trip is made wholly and exclusively for business purposes, and isn't considered 'ordinary commuting'.
Self employed advisory fuel rates guide
Advisory fuel rates are recommended repayment amounts a company can use when reclaiming the fuel element on business mileage.
The rates are used to calculate:
- How much employers should reimburse employees for business travel using the company car
- How much employees need to repay employers for private travel using the company car
- The VAT you can claim back on business mileage using your personal vehicle
Can I expense mobile phone?
As a sole trader, you can't claim for the line rental if you're using your mobile phone for business and personal use. You can claim the costs of business calls, if these are indicated on an itemised bill. To claim for the costs, you'll need to set up a mobile contract under your business name, and use it solely for business purposes.
As a limited company director, you'll need to set up a contract between your company and service provider in order to claim the full costs as a deductible business expense. If the contract is made under your personal name, you won't be able to claim the costs as an expense.
Refer to our guide on mobile phone expenses for further information.
Can I expense Legal costs?
The costs incurred for engaging professional services-such as hiring a lawyer-can be claimed as an allowable expense, as long as these services are carried out solely for business purposes.
Can I expense Office rental?
Yes, you can claim office rental and the costs of using a coworking space as a deductible business expense.
The best business bank account: Tide, Revolut, Starling or Metro?
We road tested the best business bank accounts out there so you do not have to.
Starting with the four contenders with the best features and costs on paper, we put them through their paces testing usability, ease of sign-up, response times and the day to day banking experience.
The full details are below, so you can experience what each one is like from the inside, without having to go to all the trouble of opening accounts with each of them.
It's a long article, so let's get to the conclusion and summary first for those who just want to see the results.
At the end of the day, different businesses have different needs and there isn't a one-size-fits-all bank account.
Freelancers and contractors have two strong options: I personally recommend you to go with Starling given its ease of use and low fees.
However if you are more of a traditionalist and like the support that a physical branch provides, go with Metro Bank.
For a small business, Revolut is the clear winner.
Can I expense Stationery?
Yes, you can claim office costs (such as the purchase of stationery) as a deductible expense.
Personally paid expenses vs company paid expenses
Where possible, it is advisable to cover any company expenditure directly using company funds such as directly via the company bank account. This ensures that all company transactions are kept in one place and can be easily tracked.
Can I expense Software?
You can claim the costs of purchasing computer software that your business uses for less than two years. You can also claim for computer software that you use for more than two years, if your company makes payments regularly to renew the license.
Can I expense Computer equipment?
Yes, you can claim the purchase of computers as a deductible expense.
Can I expense Travel & subsistence?
You can claim travel-related expenses, as long as the travel is wholly and exclusively for business purposes and isn't considered 'ordinary commuting'. HMRC defines a commute as a trip that you make between your home and a permanent workplace.
You can claim for:
- costs associated with running a car or vehicle, such as fuel expenses, parking fees and tolls.
- transport fares for flights, as well as rides taken via train, bus, taxi and ferries
- meals and accommodation for overnight business trips
You can claim "reasonable" food and drink expenses if:
- You're making an occasional business trip outside of your normal pattern of travel
- You're staying overnight, and are also claiming accommodation costs
- Your trade is, by nature itinerant
Can I expense a Laptop?
The portability of a laptop brings in a layer of complexity, as they tend to be purchased for both business and personal use. You can claim it as an expense, but you will need to apportion between business and personal use.
Do I have to pay tax on expenses?
You do not need to pay tax on allowable business expenses. These are essential business costs that are incurred "wholly and exclusively" for the purposes of running the business. They can be deducted against your income, thereby reducing the amount of tax that you need to pay.
Do I need to retain expense receipts?
You need to keep your receipts for expenses for at least five years after the 31 January submission deadline for the relevant tax year.
It helps to minimise paperwork wherever possible, so we recommend taking a picture of your receipts and storing these images away digitally. You can use cloud storage platforms like Dropbox or an expenses app like Expensify.
Can I expense Parking?
You can claim parking costs as a deductible expense, as long as it is incurred wholly and exclusively for business purposes. Other allowable business travel expenses include tolls and congestion charges. You can't claim parking fines as a deductible expense.
Can I expense Optical expenses?
You can claim an eye test as an allowable expense, if it is required for the use of visual display equipment in your work.
In general, you can't claim for glasses or contact lenses unless these items are 'wholly and exclusively used for business purposes', and you're able to prove that you don't use them outside of your working houses. One example would be that you have several pairs of glasses, one of which is used only when you're at work.
Can I expense Ebay charges?
Yes, you can claim eBay fees, such as the insertion fee and final value fee as deductible expenses.