When you’re a freelancer or small business owner, it can be very easy to forget to separate your business from personal finances.
This is logical, seeing as you’re probably working odd hours in the middle of the night or whenever you can, trying your best to make your business succeed. Your main focus is on financial growth, and it is often a consequence that you leave financial management along the wayside.
But that doesn’t have to be case.
Keeping your business and personal finances separate is going to be crucial to maintaining quality finance management and having a good idea of the direction your business is heading.
So today, we’ll look at four of the most important reasons why you should separate your business from your personal finances and how you can do that starting today.
#1 Make tax-time easier
This is the biggest benefit of separating your business and personal finances.
When you don’t separate your finances, you could have tax problems. You may end up paying too much in tax by counting your already-taxed income as part of your business’s income, or counting cash gifts from your family as income.
Or you could forget to count business costs because you have one bank account for all your expenses. You’ve inadvertently messed up all your costs and you may underestimate how many costs your business has actually incurred over the past year. You’ll end up paying too much in taxes simply because you believe your profit is higher than it actually was.
The opposite, thus, is also possible. You’ve forgotten that cost X, Y and Z were actually personal costs and not business-related, but you end up applying it to your business anyways. Now you’re underreporting your business profit, and that can get you into some trouble with the IRS or HMRC.
It’s very good practice to not only separate your business and personal finances by getting separate bank accounts, but also by getting separate credit or checking cards. Use them strictly. Even if you’d like to buy some gum when you’re at the stationery store, use your business card then buy that gum with your personal card. It’s a little work, but it will save you a lot of frustration during tax time.
#2 Be aware of your financial position
When you’re using one account or one card for both business and personal expenses, you won’t be able to accurately track your expenses. If you don’t track your expenses, you won’t be able to know your company’s financial position at any time, and you won’t be able to create effective budgets.
Budgeting is crucial for the success of any business (or individual). Not only will you be able to track your expenses, but budgeting allows you to save up for bigger expenses or investments. It also helps you determine which parts of your business are the most and least efficient, what parts you can scale down on and what parts need investment and offer the greatest room for financial growth.
#3 Maintain good finance practices and plan for your future
When you start separating your personal and business finances, you begin the journey to maintaining good finance practices.
Once you’re on the path to proper and controlled financial behavior, you’ll begin to naturally discipline yourself in your business’s expenses. This will include the ability to save receipts as often as possible (and eventually, always), to incorporate proper invoicing procedures, and to become more financially literate.
Beyond that, you’ll be more focused on attaining those goals that now all of a sudden seem more attainable. Instead of one day wishing to have 25 employees, you can see your business’s growth much more clearly now. That means that now you can project future earnings, major goals, what it will take to achieve those goals, and even a respectable timeline for reaching those goals.
#4 Become more professional
Lastly, you’ll become more professional not just in your internal business procedures, but also to customer-facing activities.
When you’ve won the contract, done the job and sent the invoice, you wouldn’t want to mess it up with an unprofessional mistake. The company will expect you to have a business account, because they are businesses too. They know the inefficiency of using a personal bank account for your business.
When they see that you still use your personal account for your business, they will consider you less professional than you initially appeared to be.
On the other hand, a bank account that’s in your business name will give off a dedicated, well-experienced and motivated professional. A professional who has crossed all his T’s and dotted his I’s. One who pays attention to detail and is likely to provide quality goods and services.
Understanding these four crucial reasons for separating your business from personal finances should really be a no-brainer. There is no good reason to have your finances in disarray up and potentially cause you tax problems, or even the greater business problems of financial failure.
Prevent that now. Separate your business and personal finances and you’ll be well on your way to becoming a more successful business person.