Personal finance management is something many people struggle with, and it causes a lot of headaches. If you're a business owner, you know the added challenge of managing your personal and business finances at the same time. No matter what type of business you run, it's absolutely essential to manage your finances and keep business expenses separate from personal expenses.
Why is it important to separate personal and business finances? What are you doing to keep your expenses apart? If you don't know the answers to these questions, it's time you start thinking about it. It's never too late to start organizing your finances, so let's dive into the best methods to separate business expenses from personal expenses.
The Importance of Financial Boundaries
Particularly when your business is young, separating business and personal life is difficult. Blurring the lines between business and personal finances is all too easy. However, to develop good money management skills and healthy financial habits, you've got to remember that your business exists independently. The primary reasons that it's so essential to draw these boundaries and never cross them are:
- Business taxes are separate from personal taxes. Filing them will be complicated if you fail to divide your expenses.
- You'll be able to track your business's financial performance closely.
- Audits will be tough when you let your finances blend together.
By being responsible and keeping business and personal assets separate, you'll make life easier for your accountant, become more financially stable, and reduce your taxes. If establishing and maintaining good business credit seems like a daunting task, take a deep breath. With quality resources and information on your side, it can be quite simple.
7 Tips and Tricks to Separate Expenses
Although being financially responsible sounds amazing, everyone knows it's easier said than done. To help you build better habits around your business funds and start separating business and personal finances, we've compiled this list of simple suggestions.
Establish Your Business
If you've just started your business, set up a legal entity for your new venture (i.e., an LLC, C Corp, S Corp, etc.) If you aren't sure how to designate your business, the Small Business Administration can guide you to the right choice. Although it's important to figure things out for yourself and do your research, you should consult a legal expert before legally establishing your structure.
To be a legitimate business, you'll also need to get an Employer Identification Number (EIN). All you have to do is apply through the IRS's website. Establishing your business will help you separate your finances and protect yourself from any debts, losses, and lawsuits that your business may experience.
Open a Bank Account for Your Business
If you open a bank account for your business detached from your personal account, it will force you to be more mindful of what you charge to each one and why. Additionally, ensuring you draw from the correct account each time will make your taxes easier. If you manage your business expenses through trackable channels like debit or credit cards (not cash), your taxes might be as simple as looking at your monthly statements.
Get a Business Credit Card
Building up good credit for your business is essential. Even if you have good personal credit, your business needs to be financially stable on its own, so you need to start working on its credit history. How can you do this? Easy. Get a business credit card. This will also make you much less likely to use your own credit card for large business purchases.
If you've already tried to establish good credit and things took a turn for the worse, you can still grow your business with bad credit (and rebuild good credit in the process).
Separate Financial Records and Receipts
Keep your business records and receipts in a file, shoebox, or some other receptacle that's separate from your personal records. This way, if the IRS ever has any questions about your business spending, you'll have the information you need.
Pay Yourself a Set Amount
Ultimately, an owner using company money for personal use is a bad look. Start giving yourself a paycheck regularly and stop dipping into company funds outside of that set amount. Your personal budgeting and business budgeting processes will be simplified.
Make Sure Your Business Partners Understand
It can be difficult to set rules around running personal expenses through the business, especially if you have partners. Although it can be a tough conversation to have, your venture's success hinges on you and your partners making wise and consistent financial decisions. Staying disciplined about your spending is much easier when you have others to keep you accountable (and you keep them accountable, too).
Learn What Constitutes a Business Expense
You earn tax deductions when you write off business expenses. This makes it very tempting to charge more to the company card than you should. Going out to shows and dinners with family or friends certainly don't count as business expenses. Still, sometimes it can be tough to tell. Here are some examples of business expenses:
- Business use of your home
- Business use of your car
- Employee pay
- Retirement plans
- Business rent
- Business insurance
- Business interest
- Business taxes
- Business start-up costs
- Business assets
- Improvements
- Costs of goods sold (cost of products, freight, storage, labor, factory overhead)
Start Building Healthy Financial Habits Today
If you want your business to flourish, you've got to learn how to split business and personal expenses. At first, it may be difficult to transform these tips into habits, but if you stick to them, you'll be glad you did. Filing taxes will be much easier, and, most importantly, you'll gain a better understanding of your business's finances, so you can zero in on ways to grow and expand. Is access to funds holding you back? At AdvancePoint Capital, we specialize in helping customers access the perfect small business loan for their situation. Regardless of your credit history and financial needs, we have you covered. Learn more about our simple application process and contact us today to get started.
