Are multiple bank accounts slowing down your finance team?

By Tessa Beuning, CPA

SUMMARY

Managing multiple bank accounts to track funds can create unnecessary complexity, increase the risk of errors, and add administrative work for local governments. This article explains how proper fund accounting can simplify fund management, improve accuracy, reduce manual processes, and strengthen overall financial operations. See Frequently Asked Questions.→

---

 

Tracking multiple funds for your local government can be complicated. With so many departments, transactions, and allocations, it can be hard to keep it all straight. While using multiple bank accounts may seem like a solution, it often leads to a higher risk of errors and other issues. The good news is, fund accounting takes care of this for you.

Here’s how proper fund accounting helps streamline your organization’s financial management.

What is fund accounting?

Fund accounting involves tracking funds through coding instead of separate bank accounts. This means that each transaction is coded to indicate from which fund the cash should be withdrawn or deposited.

Problems with multiple bank accounts

Many local governments use multiple bank accounts to manage funds simply as a legacy practice—because it’s the way it’s always been done.

Here are common issues we see with this solution:

• Increased complexity: Shared transactions often require transfers between accounts. For example, single payments (e.g., from grants) must be deposited into one bank account and then redistributed.
• Higher risk of errors: More steps increase the chance of mistakes. And if an error occurs, remedying it involves a time-consuming solution of re-doing bank reconciliations and physically transferring funds.
• Extra workload: A higher number of bank accounts means more accounts to monitor and to reconcile each month.
• Added confusion for vendors: Multiple checks or split payments can cause issues for vendors.
• More bank fees: Maintaining multiple accounts opens the door to an increased cost of bank fees.

When a separate bank account makes sense…

Certain grants or bond requirements may require funds to be managed in a separate bank account. Separate bank accounts may also make sense if the city is a fiscal agent for another entity or when managing funds in trust or large capital investment accounts. To evaluate if an account is truly necessary, it’s important to first review its original purpose and check for any restrictions.

Benefits of proper fund accounting

Proper fund accounting—i.e., with correct coding—can achieve the same separation as multiple bank accounts more efficiently and with less risk for errors. Benefits of this solution include:

• Automatic allocation: Automatically allocates coded transactions across city fund cash accounts without the need to manually transfer money between bank accounts.
• Fewer errors: Creates a self-balancing system that helps to ensure the accuracy of each fund’s cash.
• Easier corrections: Allows errors that do occur to be fixed with a simple journal entry instead of by moving cash around.
• Improved efficiency: Reduces the administrative burden of maintaining multiple bank accounts.
• Timely reporting. Eliminates the need to wait until the monthly bank reconciliations are completed; reports can be run in real time throughout the month.

Strengthen your local government’s fund accounting

If your organization has been using multiple bank accounts to manage department or project activity, it can be hard to imagine a different solution. But embracing strong fund accounting practices can help you and your team members reduce errors, save time, and improve your organization’s financial management.

As a first step, consider evaluating existing accounts and determine which are necessary. You may also need to educate non-finance leaders who may be hesitant to make a change on how fund accounting works. Your Abdo advisors are here to support you as well. We can work with you and your team to guide you through best practices for fund accounting and help you implement a coding system.

If you have questions about fund accounting or would like to learn more about how we can guide your next steps, contact us today.