A common problem for entrepreneurs during the early and middle stages of their business is that they sometimes entwine personal and business finances. “It’s still part of my money anyway, right?” Not really. As the line between the two blurs, documenting and getting the right numbers become more difficult.
There are many reasons why your business finances should be accounted for separately from your personal finances. First of all, it doesn’t look professional. Having a trade/business name adds credibility to what you do and what you sell. While it might not seem like a big deal at first, having checks made out to your name might rub off wrong on other people or businesses.
More importantly, separate your business and personal finances for tax reasons. As a private citizen, most of your taxes are direct and easy to manage. As a business owner, however, other factors come in and complicate matters. How would you know if you’re already paid up on income taxes, sales taxes, property taxes and other taxes when you can’t even identify what tax is for what side of your finances? It’s only a matter of time before you miss opportunities such as deductions or worse, miss tax payments.
Finally, it’s easier to map out your finances when they are separate. Forecasting, adjusting and strategising for your business are easier when done separately as it allows you to focus on your business goals and where you are in them. It’s also easier for your accountant or virtual CFO to understand how your business is really doing when everything is discrete and properly documented, allowing you to make more sound and controlled business decisions.
What do I do?
Ask any financial consultant how to separate your finances and they’ll come up with the easiest tip: Just be mindful and detail-oriented in your finances. Unfortunately, this is not as easy as it sounds. We came up with some tips that can help you focus your strategy.
Open separate accounts. - Separate accounts makes it easier to compartmentalise your revenue and expenses.
Identify what qualifies for a business expense. - If your expense was made purely for the sake of your business, say buying supplies, paying up energy bills for your office or a purely business trip, and you have documentations and receipts, then you could write it up as a business expense.
Receipts. Receipts. Receipts. - Remember to always ask for the receipt and separate your expenses. Your receipts can help document and give a picture of your finances.
Work with financial experts. - Even the best entrepreneurs make mistakes sometimes. Instead of ending up on the wrong side of the road, err on the side of caution and work with certified accountants.
Separating finances is crucial in clearing up your obligations and understanding how your business is really doing. Be consistently mindful about your duties and opportunities as an entrepreneur.
Need more insights on improving your financial system? Download our free eBook, The Financial Pillar, and learn about the opportunities that exist in improving your financial management system.