It's easy for your personal finances to get tangled up with your business finances. But no matter what type of business you're running, it's a good idea to keep your personal finances separate from those of your business.
Don't worry if you haven't yet separated your records into personal and business stacks; it's never too late to start.
Just as you don't want to pull more money out of your business than your business can afford, you don't want the business to pull more money out of you than you can afford.
1. Set up separate checking accounts.
Separate your checking accounts and be diligent about drawing on the right account at the right time. If you can manage to only use your business debit card and avoid cash, you may even be able to do your financial reporting straight off your bank statements.
2. Keep your receipts separate.
You don't need to use shoeboxes to store receipts (in fact, something a little more elaborate is a good idea), but whatever you use should have two physically separate locations for personal receipts and business receipts. If you don't have time to collect and sort both personal and business receipts, prioritize your business receipts.
3. Get a credit card for the business.
A business credit card will help you build up a credit history for your business separate from your personal credit history. More importantly, your credit card is one of the likeliest places for your finances to get muddled. Separate credit cards means that even if there's something a little out of reach of your business's current budget, you won't be tempted to use your own credit card.
4. Give yourself a salary and don't exceed it.
If you write a check for the same amount every month from your business's checking account to your personal checking account, you can make it easier for both your personal finances and your business finances to stay on budget.
5. Set a budget for the business.
Just as you don't want to pull more money out of your business than your business can afford, you don't want the business to pull more money out of you than you can afford. Many small-business owners find themselves pumping money from their personal accounts into their company's whenever there's a shortfall. And sometimes it's unavoidable. But if you have a clear budget based on your business's current earnings, you can help avoid both.
6. Make sure your family and partners understand the business's status.
It's important to remember that you're not always the only person involved in either your personal finances or your business's finances. Making sure that everyone is on the same page now can prevent problems later on.
7. Understand what is a business expense and what isn't.
Among the biggest pitfalls in keeping your finances separate are entertainment, food, and travel expenses. Be aware of where you are spending your business's money and who you are with.
8. Draw lines between your home and your office.
Create a division between your office and your home, especially if you work from a home office. Even if you have a home office, your business shouldn't be paying the entire electrical bill for your house. At least part of that burden should fall into your personal finances.
9. Keep logs of business use.
If you use a personal item, such as your car or your cell phone for business purposes on a regular basis, you should be keeping track of the split. Of course, life would be easier if you could have a separate car and a separate phone just for your business, but if that isn't possible, there are plenty of easy logging tools to use, especially for smartphones.
10. Talk to a financial professional.
If you are at all concerned that you are misclassifying an expense or you're having a hard time keeping your finances separate, bring in a pro. They will likely be able to help you establish a system that works for your own individual situation.
Frequently Asked Questions
Why is it important to keep business and personal finances separate?
Keeping business and personal finances separate can help prevent any potential conflicts of interest between the business and the individual, ensure that business expenses are properly categorized, and showcase accountability.
Why is it important to keep business income separate from personal income?
It is important to keep business income separate from personal income to establish the business as a separate legal entity, which can have benefits for liability and accountability.
A version of this article was originally published on April 05, 2011.
