Most emerging business owners don’t separate their personal finances from their business finances. This is an unhealthy financial habit, even if the latter is your personal business.
Regardless of your business size, as long as it is a business undertaking, you must draw a clear line between the two. This way, it will not muddle up your finances. Though this task is daunting at first, it will make your life a lot easier in the long run. Also, this is vital to your business’s long-term success.
Making an effort to open a business account can save you from devastating outcomes later on. Finance pros share some tips to separating your personal and business finances.
1. Know What a Business Expense Is
Some of the biggest pitfalls in keeping your finances separate are food, travel, and entertainment expenses. It may be tempting to write off as much as you can as a tax deduction, but remember that dinners out with your family and friends won’t qualify as business expenses, regardless of how you arrange things.
2. Set Up Separate Checking Accounts
You can be diligent about drawing on the right account if you have separate checking accounts. Get into the habit of paying business expenses from this account and depositing corporate earnings here. So when it’s tax time, you just have to review your bank statements for a clearer picture.
You can even easily do your taxes and other financial reporting if you only use your business debit card and avoid using cash.
3. Store Receipts in Different Files
Make sure to use different files or boxes to store receipts, one for personal receipts and another for business receipts. If you don’t have enough time to collect and sort both receipts, prioritize filing your business receipts.
Most tax auditors won’t care much about your personal expenses but will be quite interested in your business transactions.
4. Get a Corporate Credit Card
Getting a credit card for your business will help you establish a credit history for your enterprise. A good credit history will help you gain better access to reputable financial establishments.
Having a corporate credit card will mean that when there is something your business budget cannot afford as yet, you will not be tempted to use your own credit card to pay for it. Though you can use a personal loan and credit card to finance your business operations, it can significantly muddy the waters.
Having a separate line of credit for your business will simplify a lot of things.
5. Give Yourself a Salary
Writing a check for the same amount each month from your business checking account to your personal account will make it a lot easier for your personal and business finances to stay on budget. This will also maintain boundaries and make sure you are paying the proper taxes.
6. Draw a Line between Your Office and Home
You need to clearly delineate the line between your home and office, especially when you are working from a home office. This will help you better manage your finances. Even when you have a home office, your business should not be paying for the monthly residential electricity bill. At least part of such an expense should fall into your personal finances.
7. Keep Track of Business Use
Each time you use a personal item like your smartphone or car for business purposes, you must keep track of the split. Life can be a lot easier if you have a separate phone and car for your business. However, since that is not a practical option, you can invest in logging tools for business use which are also a more economical solution.
8. Speak with Banking and Finance Experts
If you are having a hard time separating your finances, seek professional help. Reliable banking and financial service organizations and professionals will help you establish a system that will work best for your situation. They will also advise you on the things you should do to efficiently maintain a separation between the two.
Maintaining accurate records of your earnings and expenses is among the most crucial aspects of running a business. This is the best way to get an excellent read on how your business performs. Therefore, keeping your personal finances separate from your business finances is a must.
Start by monitoring how much your business is earning, and separating it from your personal income and expenditure. Serious and costly complications may arise if you do otherwise.