When you run your own business, it is really important to keep your business and personal finances separate. I know of many small business owners who are guilty of this little mistake, but it is relatively simple to fix.
Separating your finances streamlines and simplifies your bookkeeping considerably – and with just a few easy steps, you can be clear on what goes where.
This article will show why it is important to separate your business and personal finances, and cover some tips to get you started on the right path.
The Importance of Keeping Business and Personal Finances Separate
Separating your finances is one of the most useful things you can do when starting out in business – it will save you considerable time, confusion and stress later.
There are a few excellent reasons why you should keep these finances separate:
● For clearer accounting and tax records – to make sure that you claim exactly what you should and also maximise your deductions
● To save time and stress when reporting
● To avoid extra costs and accountant’s fees if you need someone to sort out your business and personal accounts after you mix them together
● To give yourself a better idea of your business’s financial position both in terms of day to day cash flow, and also when predicting future earnings and costs
● To protect your personal assets and finances from the liabilities of your business activities
For accounting and tax purposes, you and your business are considered to be separate entities
It isn’t illegal to keep both kinds of finances together, or to pay for personal expenses with business money or to pay for business expenses with personal money. It’s not wrong, it’s just messy. Depending on your business structure, it could also have other tax implications.
Come tax time you are going to need to detail your businesses earnings, expenses, assets and deductions. You will also need to process a personal tax return detailing your personal earnings and deductions.
The simplest way to make your accounting and tax time processes far quicker and easier is to keep the books separate from the start. Otherwise you might end up claiming business deductions you didn’t make, or missing personal ones you are entitled to.
In terms of protecting your own personal assets – if your business comes under fire legally, such as if you are being sued, then a lawyer could argue that your personal finances are part of your business’s if you don’t have a clear line between the two.
Some Easy Tips for Keeping Business and Personal Finances Separate
Ideally you should have separate business and personal finances from the outset of your business, but if you didn’t, it is never too late to get this sorted.
1. Keep separate bank accounts
The simplest way to keep them separate is to have separate bank accounts for business and personal matters. You should have separate credit cards or debit cards and make sure you don’t mix them up.
2. Track your business expenses
Also you should keep separate ‘books’ by tracking your income and expenses for business through a separate system to your personal ones. If you are not tracking your business financials at all then you should definitely start.
3. Be clear about what is business and what is personal
There are some blurry areas when it comes to business and personal expenses. When working from home this can become even more of a problem.
Keeping your expenses separate when it comes to things like using your car or paying for internet or electricity is even more important here, and it makes accounting and tax time so much quicker and easier.
4. Pay yourself
One of the main reasons why business and personal expenses get blurry for business owners is that if you aren’t making solid or steady income yet, you may pay for personal expenses in bits and pieces from your business income when it’s possible, and vice versa.
One very good way to not get confused about this is to pay yourself (either a wage or drawings, depending on your business structure) upfront every month, and make sure it’s the same amount.
5. Set a budget and stick to it
Ok, so as far as tips go, this one may not be as easy as some of the others – but it can be done and it benefits your business so much if you do it. (This is also something that a good bookkeeper can help you to set up if you need it!)
You should set a budget based on your business earnings and expenses. Then do whatever you can to ensure you don’t dip into business money to pay for personal costs or bring personal money over to cover business expenses.
Keeping Separate Business and Personal Finances: Final Thoughts
This all may seem like it means more time and work for you, but when you put in this work up front, you will save tons of time and stress when tax time rolls around.
If you have any questions about your specific business and personal finances and how best to separate them, get in contact. We can help you today (and it’s never too late to get these sorted!)