How Many Bank Accounts Should Your Nonprofit Have?

How many bank accounts should your nonprofit have? Well, there's no one-size-fits-all answer to that question because it varies depending on your situation. But, I've got some pretty good guidelines that I think will apply to you no matter what your size. 

     There are two goals to consider when setting up bank accounts in a nonprofit. Definitely keep these two things in mind: 

1.   We want to simplify the accounting and make it easy to see what's happening and what has happened.
2.   We want to do this in a way that protects our resources. 

So, while there truly isn’t a one-size-fits-all approach, here are my guidelines based on 25+ years of CFO experience. 

The Nonprofit Expense Account

     Generally speaking, the first account you need is an expense account. You might call it your “payables account.” It's where all the out going transactions happen, and it’s for all the payments going out. You’ll fund that every week based on the payments that are scheduled to be paid that week. (If you don’t have a system for doing that, you need one- let's talk!) 

The Nonprofit Payroll Account 

     The second bank account your nonprofit needs is a payroll account. This is what you’ll use to pay out all of your payroll checks, direct deposits, and the related payroll taxes. The reason I recommend a separate account for payroll is because it allows for confidentiality of your payroll data. It's separated from those other expenses that may or may not be managed by another staff member. It also allows for a really transparent review of the largest expense going out of your organization. What do I mean by this?  Well, I strongly recommend that the person performing the accounting is different from the person reconciling the accounting records. By doing this, the second person that's doing the review can more easily spot the trends that could raise questions. This extra layer builds in additional accountability.

The Nonprofit Deposit Account

     The third account I’d recommend is your deposit account, which is literally what it sounds like. All revenue, every dollar being deposited, goes into this account. Once again, this allows for a reviewer to easily see trends and quickly notice any significant changes. In this system, all of the money coming into the deposit account can then be strategized. With your deposit and payroll accounts set up, you’ll already know exactly how much you need to fund payroll and cover weekly and monthly expenses. With that being said, you’ll know that all the money remaining in the deposit account has opportunity to be invested. 

     Depending on your banking relationships, many banks offer excellent investment products. There's options like an ICS (Insured Cash Sweep) and CDARS (Certificate of Deposit Account Registry Service) and a lot of other sweep repo-type arrangements. The options available to you will depend on your banking  relationship. So this is where you want to bring them to the table to have this conversation. 

     Now, I need to point out that this blog does not address credit risk matters, which are very significant. This is often where we think about FDIC insurance. Keep in mind that FDIC insurance covers $250,000 per entity (or EIN number) per bank, not per bank account. So regardless of how many accounts you open at a single bank, you’re only covered up to $250,000 total, because it’s per entity. So you'll want to keep that in mind and if you are managing a balance over $250,000, then you need to assess those risks. In such a case, I would encourage you to have an investment policy to address this. 

     I hope this guide has been really helpful. If you are starting from a place where you only have one bank account, then it’s time to start thinking about how to break those off one piece at a time, and I’d recommend that you get started soon. If you need some help, I'd love to do a consult with you! Please feel free to book a consult with me here. I do hope you have a CFO-minded strategist in your pocket, but if you don't, then I'm here if you need me!