Happy birthday to you, Virtual CPA! One year ago today was your first blog. And today is my first blog! My name is Dan Hartman and I work as a staff accountant for Jeffrey D. Reimer, CPA. Here begins my adventure into the world of blogging!
I’m wondering how many small business owners pay overdraft (OD) charges on a checking account that often dips below zero. If you never do, hurray for you! Go have dinner with someone special to you If you do pay these fees to the bank, please read on.
Everyone knows that interest is the cost of the use of money over a period of time. What interest rate would the bank pay you if you deposited money in a savings account or a Certificate of Deposit? When you overdraft your checking account, basically the bank is giving you a loan, even if just for a day or two while the balance is below zero. You can think of the OD charges as the interest that you pay the bank for that short-term loan.
So, here’s a simple example of the high interest rate you could be paying on your overdrafts. Let’s say you overdrew your account by $600 with 3 transactions, resulting in a $30 fee per overdraft. This is a $90 fee to establish a $600 loan with your bank. $90 divided by $600 multiplied by 360 days per year results in an annual interest rate of 54%! Compare this interest rate with the interest rate the bank would pay you on a savings account or even on a CD. Wow!
Effective cash management keeps track of your cash on hand, pays your vendors timely and keeps payments coming into the business from your customers. Various tools are available to manage your cash flow.
If you need assistance with cash management, I recommend that you contact the Virtual CPA at info@jreimercpa.com or visit www.jreimercpa.com.
With the knowledge of what you are paying in overdraft fees, I would also talk to your banker to ask them about services available to limit the “interest” you are paying. This may include an overdraft protection line of credit. So go have a great discussion with your banker and save yourself some money!
See you later!
Dan
