When you start a business it’s your baby. Many people bootstrap it and without the pressure of external accountability to banks or investors it is tempting to run your personal and business finances as if they are one.
Well this is a recipe for disaster at a number of levels.
Many business owners say to themselves
“Well it’s my money anyway so what does it matter who pays for what. It’s easier to run everything through the one account and I’ve got to spend my time building the business not wasting time worrying about who pays for what just to make some bean counter happy!”
Whether you are just about to start a business or have been in business for a while it is not too late to build a brick wall to separate your personal finances from those of your business.
It does take a bit of time to set it up and does require discipline to maintain it but the benefits are well worth it.
In fact here are five very important reasons to start construction today.
1. You will know exactly how much your business is really making
If you don’t keep your accounts up to date (and whilst I am hoping you do I’m pretty sure you wont be) then the only way of having any idea of how your business is going is to look at the bank balance.
But even intuitively you can’t look at your business bank account as a barometer of your success because you have raided it for your grocery shopping and living expenses. Providing you have enough to meet your personal and business expenses the temptation is to think that everything is going well.
2. So you don’t overspend or underspend on yourself
Everyone needs a certain amount to live on and if you run your own business then you need to pay yourself a salary. (In fact I firmly believe you should pay yourself three salaries – but that is for another day!)
If your business and personal expenses are separated you can budget properly for what you need to live on and transfer that amount each month to a personal account.
Then when you dip into the business account to purchase a personal item because you feel that life, as you know it, will come to an end without it – it will be a considered act. It will be done with full knowledge that you have overspent on your personal funds for the month.
Having separate accounts is an easy way to budget without having to budget. Just spend your personal funds until they are gone and then stop spending!
3. Because it is a good discipline to pay yourself a commercial rate of pay
Earning a squillion may not be your motivation for going into business. Perhaps your business is all about lifestyle, or giving back to the community or having the opportunity to do it your way.
Regardless of your motivation it is a good discipline to pay yourself a commercial rate of pay for what you do in your business.
The easiest way to work out how much that would be is to imagine that you need to recruit someone to replace you. Draw up a job description for the position and then get on to some online recruiting websites and see what you would earn if you applied for a similar position.
If you are effectively working part time – because you have gone into business for lifestyle reasons then build that into your calculation.
It doesn’t matter if you can’t afford to pay yourself that from day 1. Knowing what that figure is gives you a good starting point to work out how much you need to be earning for your business to be viable.
4. It makes it much cleaner for a bookkeeper and therefore cheaper
You might hate bookkeeping and think accountants are boring and anal but the sad reality of life is that when you are in business you have to prepare accounts and there are taxation departments in nearly every country of the world who will require reports from you.
So if you want to make that as painless and inexpensive as possible then separate your business and personal expenses.
Imagine you run everything through one bank account. In order to prepare a set of accounts for your business someone has to go through every credit card slip, every cheque and every cash payment to firstly divide them into a business or personal pile. Only then can you start data entry on your business expenses.
That is one whole step you wouldn’t have to do if you made that decision at the time of purchase and paid for personal expenses through a separate account.
You are effectively touching every piece of paper that relates to your business twice and adding a whole lot more pieces of paper in there that you don’t need. Your bookkeeping time or costs will be much higher than they need to be.
Don’t think that you can just ignore the personal expenses. If they are related to the bank account that has your business transactions in it then they have to be entered so you can reconcile the bank account.
5. Good fences make good neighbours – part of keeping your boundaries in place with your business and personal life
It’s part of having good boundaries in place between your business and your personal life.
When you run a business and particularly if you run it from your home it can be difficult to know where the business ends and your life begins.
Having strong, clear boundaries in place is part of making sure your business is always your servant and not your master.
It is even more important if you have a business partner. Part of having a clear agreement with your business partner is knowing how you will each deal with personal expenses.
Say you and your business partner own a bottle shop and you both run an account there. Your partner puts the drinks for her daughter’s wedding reception on their account.
In fact your business partner is quite a party animal and pretty soon his account is so big he can’t afford to pay it off.
The business isn’t doing so well at present and you could really use the cash. This just adds another level of tension to your relationship that doesn’t need to be there. If you had agreed that each of you be paid a salary but not run an account he would have been forced to live within his means sooner and you wouldn’t be left with this situation.
What I am not saying
I’m not saying you can’t run some personal expenses through your business.
If you work from home and only have one internet connection then it makes sense to run that through your business.
It might be very good sense from a tax point of view to run your motor vehicle through your business.
Meet with your financial advisor or tax accountant and ask them what expenses can legitimately be business expenses and set them up to be paid through your business but don’t get that confused with your everyday living expenses.
Construct a brick wall today between your business and personal finances and make sure you don’t have any gaps or holes or windows. You owe it to your business and you owe it to yourself to do it now!