Knowing how to separate personal expenses from company accounts is essential to the success of any business.
However, many entrepreneurs, especially at the beginning, face difficulties in differentiating their personal finances from their business finances.
This can lead to accounting confusion, harm the company’s financial health and even lead to legal problems.
Keeping this in mind, in this article, we shall give some tips for organizing finances in a sustainable manner and for your business. Keep reading!
Why keep personal and business finances separate?
First and foremost, though mixing personal finances with those of the company might seem like an easy thing to do, it may have some very serious consequences in practice.
This separation goes beyond the organization ; it reflects on the success and longevity of the business.
To make it clearer, here are some of the main reasons to keep your finances separate.
- Makes financial management easier : when accounts are separate, it is easier to identify where the money comes from and where it goes;
- Helps in decision making : without a clear view of the financial health of the business, business decisions can be compromised;
- Avoids tax problems : Just as important, mixing finances can attract the attention of regulatory bodies.
What are the risks of mixing non-public and industrial agency fee range?
Mixing personal and enterprise budget is a commonplace mistake amongst marketers, however it could supply extreme risks that impact each the business and personal existence.
Below, see some of the main dangers of this practice!
Lack of financial control
When accounts are mixed up, it becomes difficult to understand what is company income or expenses and what is personal spending.
This impairs financial analysis and can lead to wrong decisions, such as increasing expenses when cash cannot support it.
For example, the entrepreneur pays personal bills, such as rent or entertainment, with the business’s money, without realizing that this could compromise the company’s operations.
Cash flow losses
Additionally, mixing personal and business finances can destabilize the company’s cash flow .
After all, the money supposed to be used to pay suppliers, employees, or invest in growth ends up being diverted to personal expenses.
There are just not enough resources to cover business commitments and, in extreme cases, debt has to be incurred to keep the business running.
Tax and fiscal problems
It can lead to inconsistencies in the tax return when using the company account for personal expenses.
This can draw the attention of tax agencies, such as the IRS, resulting in fines, penalties or even charges of tax evasion .
An important tip is to keep separate records, which makes it easier to prove deductible expenses and avoids complications with legislation.
Confusion in performance analysis
With mixed finances, it becomes almost impossible to assess the true performance of the business. In these cases, profits can be confused with personal resources , masking losses or making financial planning difficult.
As a result of this, the entrepreneur may believe that the company is doing well, when in fact it is operating in the red.
Loss of credibility
Investors, banks and business partners often evaluate the financial organization of a business before signing contracts or granting financing.
Therefore, a disorganized organisation loses opportunities because of a loss of accept as true with. For example, banks may deny credit when they notice financial transactions that do not make sense for a business operation.
Risk to personal assets
If finances are not separated, personal assets may be misused to cover company debts, or vice versa.
This puts the financial security of the entrepreneur and his family at risk . This is a worrying scenario, after all, business debts can be collected with personal assets, such as real estate or vehicles.
Difficulty growing the business
Financially disorganized companies have more difficulty expanding. After all, without a clear view of the available capital, investments in marketing, new products or hiring are compromised.
Therefore, having clarity in your accounts allows you to outline more solid and efficient growth strategies .
7 tips on how to separate personal finances from company accounts
As should be clear by now, separating personal finances from company accounts is a crucial step in ensuring the sustainability and growth of the business.
With this in mind, we also decided to bring you 7 practical tips that can help with this organization. Check it out:
1. Open a dedicated bank account for the company
Having a separate checking account for business transactions is essential for the business.
This prevents personal and business income and expenses from getting mixed up, making financial control easier.
An extra tip for this is to research banks that offer packages aimed at companies with reduced fees and useful features.
2. Establish a fixed salary
The pro-labore is the amount that the entrepreneur defines as his fixed, monthly remuneration. It must be withdrawn from the company’s account regularly, as if it were the owner’s “salary”.
To define this, base yourself on the profitability of the business and essential personnel costs, and adjust this value as the company grows.
3. Use financial management software
Well-structured applications or spreadsheets can help you record all your income and expenses, both personal and business. They can then be used to generate reports, providing a clear view of your business’s financial health and avoiding confusion.
4. Have a financial plan for the business
Create an annual budget for your business, detailing your income, fixed and variable expenses, and an emergency fund.
Another practical tip is to review the planning periodically to adjust it according to the reality of the business.
5. Separate expense receipts
Keep all receipts and receipts of business expenses. This makes it easier to organize and is also essential for reporting to the IRS or for internal audits.
To do this, for example, create separate folders (physical or digital) for business and personal expenses.
6. Hire a trusted accountant
An experienced accountant can help keep your business compliant with legislation, organize your finances and avoid tax problems.
In addition, he can also provide guidance on how to separate accounts more efficiently, help with tax management and offer valuable insights for business growth.
7. Avoid cross-lending
It is common for entrepreneurs to use personal money to finance the company, or vice versa. However, this should be avoided as a first rate deal as feasible, as it may motive confusion in financial manage.
Here’s a solution: if you need to carry out this type of transaction, document everything . For example, record the amount as a loan or capital contribution.