Why Separating Your Business and Personal Finances is Important | Lauzen Accounting

Why Separating Your Business and Personal Finances is Important

Money Management
Money Management, Why it Matters to your Small Business
September 10, 2015
Hot Topics: IRS Issues Final Instructions for Health Care Reporting
September 23, 2015
Money Management
Money Management, Why it Matters to your Small Business
September 10, 2015
Hot Topics: IRS Issues Final Instructions for Health Care Reporting
September 23, 2015

It’s not uncommon for the lines between business and personal finances to get blurry. Mixing the two, though easy to do, can spell failure for your small business. When records get scrambled, they can be difficult to repair.

It’s important to keep your business and professional finances clearly separated for several reasons. Here are just a few:

  • Keeping your finances separate will allow your business to apply for credit. This might not seem important now, but as your business grows, having access to funds is essential.
  • Keeping your records separate can save you money. Many business expenses are tax-deductible, but you’ll need to provide proper documentation.
  • Maintaining separate business records makes your business look professional in the eyes of potential investors.

Getting Started

Even if you’ve not kept your expenses separate from day one, there are four things you can do now to get you back on the right track.

  1. Establish separate accounts.

If you do not already have separate savings and checking accounts for your business, these should be established right away. Most banks and credit unions have free or low-cost options that work well for small businesses.

Your business account should be used to pay all of your business related expenses. If you use your account to loan yourself money, it will become very difficult to justify any business related expenses you need to claim in the future.

  1. Keep your receipts separate

Develop a separate filing system for the receipts or any other financial documents related to your small business. If business and personal receipts are kept together, it can be difficult to tell the two apart.

A copy of each receipt, invoice or financial document relating to your business should be kept on file. A bookkeeper can help you establish what can be classified as a business expense, if you’re not sure and also assist you with setting up a filing system that’s easy to maintain.

  1. Create a budget.

A budget will help you to stay accountable and avoid unnecessary expenses. This budget should be clearly differentiated from your personal budget.

Without a small business budget, it’s easy to get off track and manage growth. As your business grows, so does the complexity of your budget. This is why having a relationship with a professional bookkeeper or accountant is so important. An experienced professional will help you create your budget and put together reports that will help you to interpret your results.

  1. Pay yourself regularly.

Finally, consider paying yourself a regular salary. This helps you to avoid temptation to mix your finances and helps you maintain your budget.

Writing yourself a bi-weekly or monthly “paycheck” is a small business best-practice. Your earnings will change as your business grows.

Taxes

Co-mingling your business and personal expenses can lead to serious tax penalties. In fact, the IRS requires that you keep your business and personal expenses separate.

It’s important to keep clear, consistent business records so that you can file your taxes easily and correctly. Your business is likely subject to different tax regulations that you are personally, and in some cases, you’ll have to file more frequently.

IRS regulations can be difficult to understand, even for the most seasoned business owners. Relying on an experienced financial professional can help you to avoid any pitfalls.

The Bottom Line

Keeping your finances separate is a must, but you don’t have to go at it alone. Outsourcing your bookkeeping is a great way to allow you the time to focus on your business operations without losing your precious time or being bogged down by the cost of hiring a full time staff member.

If you enjoyed this article, download our free eBook: Why Small Businesses Fail and How to Avoid the Same Fate. It’s packed with suggestions for avoiding financial problems that could lead to failure for your small business.

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