Why You Should Separate Business and Personal Finances

For many entrepreneurs, it can be all too easy to intertwine personal and business finances.

 

If you’re one of the 29 million small business owners in the U.S., chances are, you have a lot on your plate, from overseeing marketing strategies to inventory and employee management to managing your company’s accounting and finances.

And for many entrepreneurs, it can be all too easy to intertwine both personal and business finances. But separating your finances is absolutely crucial to the success of your small business, not to mention that it can open up additional funding opportunities, help cash flow, and provide more growth opportunities.

So if you haven’t already begun the process of separating your personal and business finances, it’s time to make the distinction. Here’s how.

Create a Budget

Budgeting acts as a roadmap for both your small business and your personal life. It can highlight financial strengths and reveal areas that might require financial assistance.

Once you’ve created and are adhering to a budget, the stress of financial uncertainty is lessened, and unexpected or large purchases can be made more confidently. Along those same lines, budgeting in your personal life builds healthy spending habits you can then translate to your small business.

Maintain Good Credit

Did you know your personal credit can be a risk to your small business? If your credit history is weak, there are ways to improve it. Cutting down on credit card debt and making payments on time are two of the best ways to improve your credit history.

Be sure to review your credit history and dispute any errors, and also check to see if you’re spending within your limits. Pay off any small balances and mark payment due dates on your calendar.

Tools like Credit Karma give even more suggestions for improving your credit. Remember: Maintaining and building a healthy personal credit can help you develop strong business credit.

Have Separate Checking Accounts

Combining your personal and business checking accounts can tempt you to borrow money from your business for your personal life, and vice versa. Having separate accounts prevents this temptation and sets your business up to scale in the long-term.

Another reason to incorporate clear divisions between personal and business accounts? The IRS actually requires a separate account for incorporated businesses. To maintain a clear financial history for both accounts, create two separate systems in any financial tools you use.

Tools like InvoiceASAP or Xero can help you track receipts, invoices, payroll and other expenses for your business. Personal finance tools like Mint connect to your bank account and can help you plan and stick to your budget.

Get Business Funding

Along with separate checking accounts, businesses also need separate sources of credit. Every business needs access to capital from time to time for hiring, marketing, or general cash flow needs.

A strong business credit score can equate to better rates and terms for your funding. Having a line of credit available when needs come up also reduces the temptation to use your personal finances for your business and keeps you in line with your budget.

Know the Difference Between Business and Personal Expenses

It’s tempting to write off dining, traveling, or entertainment as a business expense. However, it’s important that these activities actually pertain to your business.

The same goes for your personal finances. By paying out-of-pocket for business expenses, you run the risk of going into debt. Make sure you’re clear on what constitutes each type of expense. Separating expenses also keep your more organized, easing the stress of tax time and keeping you ahead of the game in case of an audit.

Let’s say you run a photography business and have set aside a room in your home strictly for your business. You keep all your supplies in there, as well as a desk with your computer where you can edit your work. This room is solely used for your photography business, and when you’re not out shooting, you spend many hours working there.

Now let’s say you have friends coming into town, and they won’t be staying in this room. You realize you need to go grocery shopping so there’s plenty of food. You know they’ll be asking about your business and your business is run from your home, so you think, “Well, these groceries should be deductible since we’re talking about work,” but that’s not the case. Even if you talk shop with your friends, buying them food is still a personal expense.

Talk to a Professional

Financing isn’t everyone’s strong suit. If you’re not sure how to budget, how to use financial tools, or need general advice, hire an accountant to organize and separate your personal and business finances. Bookkeepers can help this process, as well. Many small businesses find a need for a strong bookkeeper to help manage and setup books in a way that allows accountants to file taxes more easily.

Small businesses continue to foster the economy, yet 20 percent struggle with receiving credit from traditional banks. For this reason, it’s important for entrepreneurs to run the finances of their businesses as seamlessly as possible so even the slightest bump in the road won’t derail them.

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