When putting the financial management in place for your business, one important step shouldn’t be ignored. Separating personal and business finances helps simplify accounting and prevent issues down the road. Keep reading to find out what is the best way to separate personal and business finances.
The difference between business and personal finances
Investopedia describes personal finance as a term that covers managing your money, saving, and investing. It includes budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning.
Business Finance means the funds and credit of a business. Finance requirements are to purchase assets, goods, raw materials and for the other flow of economic activities.
Benefits to separating business and personal finances
There are two main reason to keep personal and business finances separate, for tax time and personal finance protection. It is much easier to keep track of business expenses for tax purposes if you use a separate business account.
7 ways to separate business and personal finances
1. Open a business credit or debit card
Small business credit cards give business owners access to a revolving line of credit with a set credit limit that allows you to make purchases and withdraw cash. Like a consumer credit card, a small business credit card carries an interest charge if the balance is not repaid in full each billing cycle. You can get approved for a credit card through a bank or you can apply online.
Visit the SmartBiz Small Business Blog to read more about business credit cards, how to select the right card for your business, and how they can benefit your small business: Finding the Right Credit Card for Your Small Business.
2. Open a business checking account
According to the SBA, as soon as you start accepting or spending money as your business, you should open a business bank account. Common business accounts include a checking account, savings account, credit card account, and a merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers. You can open a business bank account once you've gotten your federal EIN.
3. Pay yourself a salary
A question we come across frequently on blogs and social media is “How much should I pay myself when running my small business?” Even the SBA doesn’t have definitive answer stating, “There is no magic formula for setting your salary because so much depends on the development stage of your business and how it’s doing.” Although that answer is vague, there are several ways you can approach salary that will help you feel comfortable about your paycheck. Our blog post has additional information: How Much Should You Pay Yourself as a Small Business Owner?
4. Separate your receipts
They always say don’t mix business with pleasure. In this case business owners should avoid mixing their personal and business finances. This is something you should be doing from the get-go. If you haven’t already, make clear definitions between your personal and business finances with separate accounts, this will give you a better vision on what you are spending and where. Set up an accounting system to help track receipts.
5. Track shared expenses
Set up your personal and business accounts with bookkeeping software. You can set up rules to automatically categorize common expenses. If something out of the ordinary comes up, tools can help categorize.
6. Keep track when you use personal items for business purpose
Here are personal expenses you can categorize for business purposes:
- Travel expenses - If you are traveling for business for more than a day, your food and lodging is a business expense.
- Local transportation that involves travel between workplaces (cabs or public transit between offices)
- Dues or subscriptions to industry, professional, or business organizations
- Union dues
- Uniforms or other work clothes that are required for work and are not suitable for other wear
- Work-related educational expenses
- Tools and any supplies necessary for your work
- Home office expenses - only if the office is used exclusively for work
- Business use of your car (mileage shouldn't include personal trips)
7. Educate your partners and colleagues
If you have employees or financial consultants who work with your books, make sure they understand the importance of finance separation. If you’re taking the step to separate and others are not, you can face an accounting nightmare. Hold a short meeting or send out an email outlining details of this important strategy and why it’s needed to run your business effectively.
Personal finance tips for small business owners
When you’re in a rut or on the verge of one, it’s not always easy to admit that you need support. Work closely with your bookkeeper or accountant to separate your finances and discuss systems and process you can use to get a handle on both.
Balance the books with online tools
Another barrier business owners find is finding the right tools to support them balancing their finances. Online tools are very useful to keep an eye on what you’re spending and where. These tools are good for equipping yourself with budget plans and credit score updates so that you can make better decisions with your cash. Since these tools are online, you can use them on the go and check in whenever you have a spare minute or two.
Create a rainy day fund
Having a financial safety net is always a savvy idea in the event that something goes wrong with your personal or business finances. Make sure that wherever you park your money, you’re getting the most for your money by choosing a bank account that can offer you a great deal on interest rates.
Save for the future
Planning on spending your later years in paradise or in a remote cottage? Making sure you have your retirement fund padded out is the only way you will get there. Nowadays there are multiple ways you can save or invest for your retirement. Find a good advisor who can explain your options, go through your finances, and find the most suitable solution for your current and future situations.
Personal finance habits of wealthy entrepreneurs
Create a motivating list of money goals.
Budgets are important and should contain clear money goals. Writing goals down and reviewing frequently and consistently will help you stay on track to grow your wealth.
Stick to a plan for spending and saving
It’s not unusual to lose track of your savings and spending. Know where your money is going and why it’s going there. Easy-to-use software can help you track and categorize the expenses you can reduce.
Put new income streams in place
New income streams can come from running multiple businesses, interest income, rentals, or capital gains. This strategy is important for lowering personal financial risk.
You can also introduce new channels to distribute and market your goods or services. Even if one channel is suffering, another with strong revenue can pick up the slack to protect overall cash flow.