According to Fundera, mixing personal and business finances is an all too common issue being faced by business owners, particularly small business owners. In 2018, around 23 percent of small business owners admitted to mixing personal and business expenses on their commercial credit cards while 51 percent of owners use their own money/credit to fund their business expansion plans while only 29 percent of them actually turn to business profits and retained earnings as a source of funding. Using personal credit to finance your business can sometimes prove to be beneficial.
However, mixing finances can leave business owners (and their businesses) vulnerable to negative consequences on their credit score, business growth prospects and even management of their business operations. With this in mind, small business owners should make it a priority to ensure there are clear, enforceable boundaries between their personal and business finance so that they and their businesses are protected.
Pay Yourself A Strict Salary
As a business owner, you would be classed as self-employed which means you don’t receive the traditional salary and benefits as a typical employee would. Instead, you earn based on the profitability of your business and any personal drawings you take from company finance. This can create potentially blurred lines, particularly if accurate records are not kept. Instead, assign yourself a standard monthly/annual salary which is incorporated into your business expenses and budget (as well as your personal budgets). More importantly, stick to the preset amount.
Having this in place means you are able to keep better business records, account for both business and personal finances and it also helps you budget better both in the business and in your personal life. View yourself as any other employee who is entitled to their remuneration at the end of the financial period, both in principle and in the business accounts.
Split The Financial Tools- Checking Accounts, Credit Cards And Even Financial Tools Used
One of the easiest ways to separate your business and personal finance is to use different financial tools in the first place. Start with establishing the financial tools needed in your business such as a business checking account for only business deposits and withdrawals. For credit purchases and establishing a line of credit in your business, opt for a business credit card rather than use your personal credit card for purchases.
Therefore if your business payments are late or credit utilization is higher than optimal, it will not impact your personal credit history. Similarly, it also acts as a buffer while you are working on rebuilding your personal financial standing. However, take it a step further and separate your apps and accounts. Create separate email and login credentials for budgeting and financial tracking apps and software such as Sage, Quickbooks, and Mint.
Draw The Line On Business And Personal Expenses
To be sure that your personal and business finances do not get muddled, you must first understand what qualifies as a business expense. Some of the most commonly miscategorized expenses include travel, food, and entertainment. Seek professional advice on the qualification criteria for business relief when it comes to these expenses and any following tax relief.
If you are a small business owner that works from home, create a separate space for business operations and be sure to clarify the division of shared bills such as mortgages and utilities. Once you can clearly categorize your business and personal expenses, it is easier to prevent bleeding between the two and also helps you narrow your options on what relief you are entitled to, if any.
Track The Use Of Assets For Business And Personal Use
The reality of being a small business owner means that there are likely to be some assets that may be shared between your personal and business needs such as vehicles, electronics or even office space. This can also apply to your employees. Be sure to keep accurate records to log the split between business and personal use. For vehicles, apps such as MileIQ and Everlance can track your mileage while others such as Expensify helps with account for business use on smartphones.
Splitting your business and personal finance is beneficial for many reasons. Not only does it protect you and your business but it is also essential in identifying any cash flow issues and just how well/not well your business is performing. Mixing the two only muddles the waters for both your personal financial perspective as well as your professional performance. However, a few simple safeguards can ensure you and your financial health stays intact.