Certain things shouldn’t be mixed, no matter what. Business and personal finances are just those things that should be kept distinct. Mixing both of these finances only leads to confusions and potential losses (and disasters). If you use your money interchangeably between personal and business purposes, it will become difficult for you and your small business accountant to determine business expenses.
You ask any small business accountant, and they’ll suggest the same. Why? Because it’s a big NO-NO in the world of business accounting. So how do you keep these two different and unmixed? It’s simple; just follow these seven steps.
1. Set Up Separate Accounts
First things first, open two separate accounts for your personal and business income and expenses. Do you already have a personal account which you are using to look after your business as well? This is a big mistake! You may lose track of your business incomes if you let all your personal and business incomes get accumulated at one place and make all your payments from there. Hence, find out which banks are offering the best business offerings, and open a new business account in that bank. Get a new credit card as well for your business so that you can look after major business expenses separately. Having a separate business credit card means you won't be tempted to use your credit card.
2. Store Receipts Separately
Are you a person who recycles shoeboxes and cereal boxes for storing important documents? Yes? Great! So now, you will have to find one more box and separate all your business and personal receipts and invoices. If you don’t use these boxes, then choose some other boxes, or drawers maybe, as two separate physical places for your business and personal affairs. During the time of financial audit or tax season, your small business accountant will find it easy to look at your business expenses and incomes. If you hand over a file full of mixed documents, it will waste your time as well as theirs.
3. Draw a Line
You have created a separate business account and have a separate credit card as well. What next? Now, it’s time to change the way you spend. Use only the business card for business-related transactions. If you have exceeded your home’s budget for the month, don’t be tempted and use your business credit card to buy groceries and gifts. It will only impact your business accounts. Set separate budgets and stick to them. In case you cross either of your budgets, DON’T touch the other account.
4. Pay Yourself
As you are the boss, you need to pay yourself too. Just like you release salaries for your employees every month, you must do it for yourself as well. Set a realistic salary amount for yourself. On the 1st of every month, transfer that amount from your business account to your account. The same should apply to the months when your business gains profits or when it’s the time for bonuses. Once you get paid, you can create your home budget from that. And then, wait for the next payday!
5. Maintain Books of Accounts
Do it for your business incomes and expenses. Preserving bills, receipts, invoices, and other documents aren’t enough. You need a written overview of all your incomes and expenses so that you don’t miss out on any transaction during tax filing or calculating profit-loss figures. If you only rely on documented proofs, you may miss out on minor expenses that don’t actually have a supporting document. You and your small business accountant will end up wondering where your money went. Hence, create detailed books of accounts for all your business transactions. You can use software like QuickBooks, or let your accountant do it for you.
6. Separate Assets
This is very important! Along with separating your accounts and budgets, you also need to separate assets. If you need a new laptop for your business, pay for it from your business account. If you are buying two laptops together - one for your spouse and one for your employee - get separate bills for each. Likewise, you must have separate bills for other stationery items, electronics, and other inventories. Have separate bills for the electricity and water you use for business purposes. Don’t end up paying these bills from your personal account, or vice versa. Doing so will only disturb your budgets, and again, confuse your small business accountant.
7. Explain It to Your Loved Ones
Well, you have done everything from your end. But your family also needs to understand the importance of separating business and personal finances. Explain everything to your spouse, kids, friends, and relatives. Let them know that they aren’t supposed to use your business credit card at any cost. Also, request them not to ask you to buy something from your business’s account only because you have exceeded your monthly personal budget.
You can ask for more such tips from your small business accountant as they know what can go wrong during important processes such as tax filing and claiming returns.
At first, it may not be easy to keep things separate and tidy. But with time, you will get used to keeping your business and personal finances separate. Talk to your small business accountant as soon as you mix them up by mistake. Doing so will help the professional to separate the finances at the very moment.