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How to separate business and personal finances

Every business owner makes a set of mistakes in his or her life. But one of the gravest mistakes a business owner can ever make is mix up their business and personal finances. This can cost you a lot in the long run, especially when you have to pay personal or business tax or get exemptions for your expenses.

So how can you avoid this mistake? Here’s how.

Set up Separate Bank Accounts

You already have a personal account. But what about a business account? Having a separate business account is as important as having a business website (or even more important). You want one bank account that takes care of all your business incomes and expenses. Even if you are a home-boss, a separate bank account is required. All your business procedures such as tax planning and filing, financial auditing, regular accounting, and bookkeeping, etc. can be managed from this account. Plus it is the best way to keep your personal transactions away from your business. So, find out which banks around you offer the best rates for businesses, and get a new business account opened.

Have Separate Payment Modes

A separate business account also means separate credit card and cheque book. For transactions where you will have to make quick payments such as buying stationery for your office, you can use your business’s credit card. Same way, for payments to your merchants and other business connections, you can pay through your business account chequebook. If you don’t have these easy mode of payments exclusively for your business, you may end up using your personal credit card in emergencies. It’s better to be prepared for every situation so that you don’t touch your personal finances.

Segregate Documents

A lot of people, regardless of whether they are business people or not, tend to preserve receipts of every transaction they make. As a business owner, preserving documents isn’t an option for you; you have to save every invoice, bills, receipt, and other documents of transactions. But if you shop for your house as well, you need to be alert now. You must maintain two separate files for your personal and business documents. Having a separate place for these documents will help you write-off your expenses during tax filing and also when you have to present them to a financial auditor. If you mix up your business documents with the personal ones, you will face a really tough time during our audits and tax period. You don’t want to mess up your tax returns or confuse your auditor just because you didn’t keep your personal bills away from your business.

Outline Different Budgets

Budgets are important, whether its for your household chores or your business. As you are a business owner, you already know how to create a business budget. Create a budget for your business, but don’t include any home-related expenses in this budget. Create a separate budget for your household needs. As you will pay yourself, let salary be the point from where you deduct all your household expenses. If you have another earning person in your house, their salary will also be counted for outlining your home budget. But make sure you don’t spend for your business needs from your home budget or vice versa.

Be Mindful When Spending

This is where the actual challenge comes in. People often don’t pay attention while using a credit card to make a purchase. What they don’t understand is that using the wrong type of credit card or cheque can result in a lot of confusion later on. You don’t make this mistake. If you are buying something for your house or your family members, only use your personal card for it. Likewise, if you are buying a new gadget or inventory for your office, use your business credit card or cheque. The same rule applies to utility bills, food bills, stationery, water, repair and maintenance work, and everything else. Don’t let this rule break even if you exceed either of your budgets. Wait till the next salary cycle and clear all the dues.

Use Software

It is important to draw a line between your personal and business expenses so that you can file your taxes correctly. Accounting software will help you the most to draw a line in between. You will have to use software like QuickBooks and register on it using your business credentials. Make sure you account every income and every expense you made for your business in this software. Accordingly, the software will help you with the right tax amount to be paid. It will also calculate the deductions and provide you with a clear picture of returns that you should expect. This way, you will be at ease during your tax season.

But using software isn’t enough, you will have to separate your personal and business incomes and expenses as mentioned above, and feed the same data into the software.

Let People Know About This

It is very crucial for your people to know about the division, especially your family. You know the difference between a personal and business expense; now make sure that your family members and other people involved in your business do, too. It won’t take a lot of time for your kid to use your business credit card for the next online transaction she makes. So let your family members and friends know that they aren’t supposed to use your business credit card, if they find it around, for any of their transactions.

Don’t forget to pay yourself on the 1st of every month or you won’t be able to look after your personal and household expenses for the rest of your month. Decide a fixed amount for your salary and transfer that amount from your business account to your personal account. The same should apply to the months when your business gains profits or when it’s the time for bonuses.

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