During the early stages of a business, it is common for business owners to use their personal capital to jumpstart it. As the enterprise continues to grow, the line between personal and business finances becomes blurry.
However, this is simply a bad practice for larger, self-sustaining companies as it can become a much lengthier auditing process. Should an accusation arise due to the mismanagement of your finances (such as tax evasion or other illegal activities), it will be harder for you to deal with such issues. Once your company has reached a point where it is large enough to maintain itself, it would be in your best interests to invest in finance management.
Before getting into the process of personal finance management itself, it is important to first distinguish between the two. This is because it is up to you to draw the line between your office, personal finances and expenditures. Whenever you make any sort of purchase, you should know immediately which category it falls under. There are very few cases where a purchase is both personal and business related - for example, purchasing a laptop both to use at work and for leisure. In cases like this, you need to determine the percentage of the total cost that would fall under either category. Let us say that the aforementioned laptop will be used mainly to allow you to work wherever you go. If that were the case, you may say that 70-80% of that expense is for work.
Now that the difference between the two has been established, here are a few tips to make separating them much easier.
- Keep separate accounts
This is essential, even if most it seems as though it is an obvious solution. Tracking the movement of your money is easier when you know if it is for personal or business use. However, your work and personal bank accounts are not the only things you should keep separate. If you are paying for outsourcing or using any accounting software, you should track them under different systems in order to avoid factoring both categories into your calculations.
- Separate your receipts
This can be as simple as storing them in two different physical containers, however you would like to segregate them it is important to ensure they do not get mixed together. This will help you avoid any additional headaches from digging through piles of paper to search for a single receipt. You can even take this a step further by subdividing them into categories of your choosing: time, amount, type, etc.
- Give yourself and your business a budget
Being a business owner, it is likely you will receive the profits and have no need to set a salary for yourself. However, giving yourself a salary enables you to clearly determine the percentage of your profits that you can allocate towards personal expenses. You can easily keep track of money flow with a set amount given to you on a monthly or semi-monthly basis. This also discourages you from using your business account for personal endeavours.
- Consult a finance professional
When all else fails, it is never a bad idea to seek assistance. There are many experts and finance consulting services out there, however not all of them will be able to help you achieve your vision of flawless personal finance management. You need a partner with a process that is internationally renowned yet still easy to comprehend. A great financial consultant will help you and your business move forward with sound financial management.
Still concerned about distinguishing between personal and business finances, or worried about the complexities of finance management in general? Download our free Finance Pillar eBook here and move your business closer to your dreams.