If you’re a business owner, it’s easy for your business’s expenses to get tangled up with personal finances. No matter what business you’re running, however, it’s always crucial to keep the two things separate. Doing so will make the growth of your business easier to do, and you’ll quickly figure out which numbers to deduct for tax season.
If you haven’t separated your business records from your personal stacks, now is the time to do so. This post seeks to guide you through the repercussions of your current financial setup, as with some tips to separate personal from business successfully. Let’s begin!
What happens if you don’t keep business and personal expenses separate?
Failure to keep your personal and business separate endangers your business through the creation of an inaccurate financial picture. Think of it this way: missing or erroneous information can lead you to either overestimating or underestimating your money burning rate. From there, overspending, fund misallocation, and other unwise financial decisions could happen. All of these could hinder your business from growing, so it’s important that your records remain accurate and updated regularly.
Tracking your expenses shouldn’t be taking your hours. If you are unable to check the status of your spending and expenses at a moment’s notice, then you’ll quickly find yourself stuck on a limbo of reporting and tracking. Without a clear line drawn between personal and business prospects, you’ll be spending most of your time going through financial records and categorising transactions. Failure to understand how much profit you have can impact your ability to make well-informed business moves, such as purchasing equipment or hiring an employee. In other words, your business’s growth suffers.
Here are some tips on how you can separate your business and personal finances:
1 - Understand the differences
The biggest culprits to keeping your finances separate include expenses on food, travel, and entertainment. At most times, the line between a personal and business expense is clear, and it takes a conscious decision to categorise them accordingly. It’s simple: any expense directly affecting your business income is a business expense. That could pertain to buying furniture for your office or any additional equipment for employee’s use. If it’s for personal use, such as a car, then that’s a personal expense. Regardless of their nature, always keep a record of your purchases.
2 - Separate your receipts and keep them
To fully solidify your commitment to making change, integrate what you’ve learned from the previous item: keep a record of your purchases. After doing so, physically separate them to understand the extent of your personal and business expenses fully. This effort will take up more space, as it calls for the use of both traditional folders (for paper receipts) and digital folders (for e-receipts). Although relatively simple, this practice will help you stay on track.
3 - Open a business credit card
Opening a business credit card is one of the best ways to keep your finances in check. It’s challenging to muddle this with personal use, as you likely own a credit card already. Having a separate credit card means that your business is out of reach, completely closed to outside elements apart from inhouse expenditures.
Separating your personal expenses from your business finances may seem such a painful task, but it’s necessary for business growth. It will also make tax season less stressful, as you’re now able to stay on top with your monthly expenses. Moreover, you will now be equipped with accurate financial information about your business, which will give way to wise business moves and well-informed decisions.
It’s easier said than done, of course, especially if you struggle with numbers. If that’s the case, let a small business accountant help you! As a team of accountants banking on innovation and creativity, we’ll provide clarity in your figures. Reach out to us today!