In today’s article, we will address a question that becomes very significant for every entrepreneur sooner or later: How to separate my personal finances from my business finances?
When you started your entrepreneurial venture, you may have been in a position to buy necessary equipment, office furniture, and rent space with your personal funds. Also, if you needed a loan, you probably pledged your personal property – a house or an apartment – as collateral.
As your business grows, the need to set a clear financial boundary between personal and business finances increases, making it easier for you to manage them and avoid potential problems.
Let’s start with expenses
The money you invest in generating revenue is a business expense. On the other hand, money spent to satisfy your personal needs may make you happy, but it doesn’t affect your profit. As a business person, it is essential to know which part of your total expenses is related to your business, so you can control, analyze, and reduce them. This can positively reflect on your over all finances.
Sometimes it’s easy to distinguish what you’ve invested in your business and what you’ve spent on personal needs. Other times, it’s not.
It is common for entrepreneurs to have a situation where some expenses can be both business and personal. For example, you use the same car to go to work, attend business meetings or buy consumables, but also to visit friends, go on a trip, or shop personally. Driving will inevitably cause fuel expenses. It’s up to you to record which part of these costs applies to business expenses.
When you have total business expenses, you will have more precise information about your result. Business books in which personal and business assets and liabilities are not clearly separated can lead to confusion, give a wrong picture of the value of your business and the resources available to you.
For example, when you invest personal funds in purchasing some securities, it represents your personal property. Even if you expect revenue from this basis, such an investment does not add value to your business. Therefore, this property should not be included in your business books.
Separate bank accounts and credit cards
Separate bank accounts and credit and debit cards allow you to keep funds separately and control them more easily. Once you open a business account, you should exclusively use it for business purposes. The same goes for personal accounts. This way, you maintain your financial discipline and know at any time what funds you have.
If you lend money to your business, make sure it’s a real loan. You’re rushing to a business meeting and accidentally bring only your personal debit card with you. Now you have to pay for a business lunch with it. This is still a business expense, and you should reimburse yourself for this amount from your business account.
More complex situation
If your job encounters problems and you decide to help your business with personal funds, let it be in the form of a loan. This loan should be accompanied by an appropriate accounting entry. In the event that you are not obligated to keep business records, enter this loan into your budget. It is very important to set a precise time frame in which your business will repay the loan to you.
Your budget in this way will have clearly defined business revenues and expenses, and you will know at any given time how much your business is earning. Determine your own salary. If you do not allocate funds for your salary, your business books will not accurately reflect your total costs because a large part, which is you, will be missing.
When you have the exact amount of your total costs in front of you, it will be easier for you to determine the price of your product or service, take steps to reduce costs, take actions to increase your sales, make other changes that will help your business succeed.
Hire an accountant
Although this may seem like an unnecessary expense, it is good to hire a professional accountant for quality financial management. They will properly classify expenses and help you with business plan development, company formation, loan requests, taxes, and finally make your books clearer and cleaner.
And finally, once you establish clear boundaries, control doesn’t have to be a big challenge. It’s just important to stay consistent from then on. This will reduce your headaches and make your business healthier and more transparent.”
