As a business owner, you might feel reluctant to keep personal and enterprise finances independent. You may find managing money complicated because of this arrangement. Besides, it is convenient to receive payments for your business in your personal account.
Well, these points are valid, but you are missing out on one important thing. In this provision, you cannot figure out income from the business so easily. Your personal accounts might hold money obtained from different sources.
Besides, if you have a lot of pending payment issues in your personal life, the money in your account might get used unknowingly. You might even consider taking out debt consolidation loans to speed up paying off pending issues. In that case, the payments you have received from your clients might be spent on this purpose.
You can keep track of all these things when you use the same bank account for business and personal finances. Ideally, your business should have an individual account. It will make managing money easier and will avoid unnecessary mixing of purposes.
Delve deeper to understand why you must follow this practice. Moreover, you will understand the importance of maintaining personal and business finances as an individual.
Reasons and steps to keep personal and business finances separate
Running a business can keep you on your toes. On top of this, managing finances when everything is mixed can make you exhausted easily. Most business owners like you might lack basic knowledge of accounting.
If you are aware of these aspects, handling finances can be easier. You might not face a lot of problems at the initial stage when you have just started. However, with a growing business, the complexities will increase, and keeping track of personal and business money will become difficult.
Why is keeping them separate crucial?
Understand the reasons why this step should be practised. It will be beneficial for your industry.
Managing is easy while paying taxes
You do not have to face exertions when personal and business finances remain separated. This also reduces the chances of errors that can prove to be fatal for your money. As an entrepreneur, you should understand how to exclude business expenses.
Besides, you should be capable of identifying the transactions done for your business clearly. Otherwise, the process can become too complex. All these can be done smoothly when finances are separate.
Then, you can provide specific information to tax preparation software. As a result of it, you can complete the tax-related calculations correctly.
Establish credibility
Without a separate bank account for your business, you cannot think of building a credit history for your business. This is one factor that might play a crucial role when you have to get external funding to support your venture in various situations.
Having an independent bank account for business objectives also shows a professional side of you. This establishes that you are serious about your company.
Your clients will not hesitate while making payments. Besides, managing financial records concerning your business becomes easy with a separate account in place.
Provide legal protection
Maintaining separate bank accounts for business and personal purposes helps in keeping liabilities separated. When finances are mixed up, your personal assets remain at high risk. If anything bad happens to your business, the creditors might take away your assets.
You are creating a limited liability while operating your business. There will be no or low obligation on you to manage business debts with personal assets.
Helpful for budgeting
Financial planning becomes effortless when you know what is coming in and going out of the business. Now, imagine when finances are mixed, segregating business income and expenses and personal expenses is very difficult.
You cannot get clarity about how much you need for personal reasons and to run this company. Your business will not suffer because of your personal transactions.
Managing cash flow
If you are concerned about the scalability of your business, you cannot ignore the importance of positive cash flow. When finances are well managed in the business, you can have enough money to spend on different purposes. For example, you do not have to meet any situation in paying the wages of your employee.
Now, if it is not clear how much you have as personal and business finances, managing cash flow will be a difficult task. Thus, the sooner you can separate them, the more reasonable it will be for your business.
How can you keep them separated?
Now, you must know how this task can be achieved. Try these steps and help your business finances get sorted out easily.
Open an account
Now, the important step, i.e., inevitable, is opening a bank account for your business. Make sure that this account is used for this purpose only, as you know what can happen if finances get mixed up. You can create an account easily and within a day or two.
Besides opening an account, you can consider having a business credit card. You do not have to reach out for your personal credit card.
Manage records carefully
Everything will not fall in place if you think that only opening an account can sort out finances. To be able to know how much you spend on your business, you must categorize some of the transactions. You do not have to do it manually, as accounting software can help you accomplish this task.
Keep aside money labelled as your salary
You might wonder why you should pay yourself a salary when it is your business. This is like motivating yourself to work hard as you receive a monetary benefit. Besides, you will be able to make sure how much you have to spend and what you can earn out of it.
- Structuring your business
Without a bank account dedicated to your business, you cannot legally structure your business. Even when you have to take out a loan, the lender will be convinced to see such an approach.
The bottom line
You can consult an advisor to help you separate your personal and business finances. This is necessary to have financial clarity. This very step can help in strengthening the foundation of your business.