When you first start a business, it is common to keep things simple. Often, this means having one bank account, one credit card and one mental bucket for money.
At the early stage, this can work because everything feels small and manageable. However, as your business gains traction and your revenue starts to grow, this kind of simplicity can start to create friction.
Sometimes it can be hard to keep track of this growth, which can lead you to not know what money belongs to you and what belongs to the business. Subsequently, bills can get mixed together, cash flow becomes much harder to read, and decisions become less straightforward than they once were.
In such circumstances, separating your personal and business finances is one of the easiest changes you can make. While it is relatively simple to do, it can have a big impact on your business by making it feel more organised, professional, and ready to grow.
Let’s explore how.
Why Should I Separate My Personal and Business Finances
By separating your personal and business finances, you gain clear visibility into your money. For instance, you can see where it comes from and where it goes. This will give you a fuller appreciation of what your business actually earns, which is important if you ever want to scale.
You can easily build this separation by using dedicated tools, accounts, and cards. Indeed, many founders start by taking the time to learn how business banking works. This includes the difference between debit cards and credit cards for business spending. Additionally, resources like OFX offer practical guidance on aspects like setting up business banking properly and choosing the right payment tools for early expenses.
When you separate your finances, you can start to make decisions in your business and personal life faster, especially those based on price or crucial to your cash flow. This enables you to run your business more professionally and with greater planning.
What Are The Risks of Mixing Personal and Business Finances?
If you mix your finances, you invite confusion that can compound over time.
To start with, mixing personal purchases with business expenses makes it harder to track your performance. This can mean that managing and predicting your cash flow is much harder, especially at tax time, when you need to sort and explain your transactions.
There is also a risk beyond this inconvenience because mixing your funds can make you susceptible to legal and compliance issues. Primarily, this is because it weakens your financial records and makes audits, lending applications, and reporting much harder than they otherwise would be. This is why it can be beneficial to contact professional business bookkeepers like H&R Block to give advice.
How Can Financial Separation Help To Grow and Scale Your Business?
If you want to scale your business, you need to make decisions based on clean data. This includes having a clear and accurate understanding of your finances.
When your business income and expenses are kept separate from your personal income and expenses, it becomes easier to spot patterns. This includes those based on your profit margins and monthly costs.
Maintaining good financial separation helps tremendously with your forecasting, budgeting, and hiring decisions. It also better prepares your business for partnerships, funding discussions, and professional advice. Such a structure allows founders to focus on strategy rather than administrative work.
What Are Some Common Signs Your Business Has Outgrown Its Shared Finances?
Many owners delay separating their finances because they believe that if something isn’t broken, don’t fix it. However, this fails to take into account that something that works well can always be improved.
If you are experiencing any of these signs, it could be indicative that your shared finances are holding your business back:
- You can’t easily explain or pinpoint where your money went last month
- Your cash flow feels unpredictable despite your business receiving steady sales
- The tracking of your business expenses takes much longer than it should
- You feel overwhelmed by the thought of preparing your tax returns
- You hesitate before investing because you are not sure how your numbers stack up
These signals often appear before businesses experience revenue problems. They can show that your systems need upgrading.
4 Steps to Separate Your Personal and Business Finances
The thought of separating your personal and business finances can seem complicated. Especially if you have been using a single account since day one. However, it is actually quite straightforward.
Here are four steps you can take to make it happen.
1. Open a Dedicated Business Bank Account
The first thing you should do is open a dedicated business bank account for all your operational transactions. This gives your business its own space for money, where all income from clients or customers goes into this account, and all expenditure comes out of it.
This makes it much easier to understand how the business is performing because with a dedicated account, you can quickly:
- Check your balance
- Review all transactions
- Track your cash flow
- Make payments
It also helps your business look more professional in how they deal with clients, suppliers, or service providers.
2. Use Separate Cards for Business Expenses
If you want your business to have a credit card, it is vital that you do not use it for personal expenses. When every purchase on the card is business-related, it makes tracking your expenditure much easier.
It also helps ensure you don’t struggle to make repayments based on the balances you owe.
3. Implement Simple Expense Tracking Systems
Tracking your expenses can be a bit of a chore. But it doesn’t need to take up too much of your time. There are plenty of expense tracking systems you can use, including the aforementioned OFX and Double Entry Bookkeeping, that link directly to your business account.
They can automatically record your spending and store receipts, which in turn can save you time and reduce the potential of mistakes being made.
4. Create Clear Owner Pay and Reimbursement Rules
A good way to maintain boundaries between your business and personal finances is to create clear rules around owner pay. This could involve deciding how often and how much the business pays you, and treating these payments as regular transactions.
Likewise, for reimbursements, make sure you record them properly so the business’s accounting remains accurate.
