What is an overdraft?

An overdraft occurs when withdrawals from a bank account exceed the available balance, resulting in a negative balance and typically triggering fees. For professional service firms, overdrafts indicate cash management problems and create unnecessary costs.

Key characteristics

• Negative account balance

• Triggers bank fees

• May decline transactions

• Overdraft protection available

• Sign of cash flow issues

• Should be avoided

Why it matters for professional service firms

Overdrafts are expensive and embarrassing, signaling cash management failures. They create fees and may cause payment failures. Professional service firms should maintain adequate balances, use cash forecasting, and consider overdraft protection as a backup, not a routine funding source.

Real-world example

Rachel's account overdrew by $2,400 when payroll hit before the expected client payment arrived. Bank covered via overdraft protection but charged $35 per item ($140 total for 4 payroll transactions) plus daily interest. Solution: implemented a 13-week cash forecast, maintained a $15,000 minimum balance, and established a line of credit for true emergencies—no subsequent overdrafts.