How business owners muddle personal and business Finances
As a business owner, it’s quite natural to lose track of your personal and business money. After all, YOU are the business. Is there really a difference between taking money out of your own wallet or your business account to pay for expenses?
Honestly, there is, and muddling the two can be quite problematic especially come tax or billing time.
But why are business owners mixing their personal and business money? Are these situations unavoidable?
Instances where personal and business money are mixed
1. They only have one account. Most business owners are okay having just one bank account. It’s less a hassle and it already fulfills the need to have a safe place to store money. However, they can use this single account to draw money for both personal and business. Once they do this, it’s easy to lose track of where the money is being used.
2. Borrowing from one fund to pay for another. There are times when business owners can’t help but use their personal money to pay for expenses in the business or use business money to pay for personal needs. These are instances where both finances cross. Not keeping track of these transactions can muddle both finances.
3. Emergencies. There are times when emergencies prop up and the money business owners have in their personal account isn’t enough to cover for the bills. In these cases, the business money gets tapped. The problem comes when the bills are too expensive it’ll be difficult to pay back the borrowed money.
These are instances when it becomes difficult not to mix both personal and business expenses. However, most of the time business owners need not have to mix the finances if each had already been separated right from the beginning.
Why is it important to have a clear line between personal and business funds?
It is only fair to set aside a portion of your income to personal expenses and to business expenses: you have your own needs that have to be addressed, and so does your business. This is why it’s crucial not to mix personal and business finances. Here are some other reasons why it is important not to mix both finances:
The dangers of mixing personal and business finances
1. Lose track of expenses. When both funds are mixed, there will come a point where the business owner will wonder where all the money has gone. It’s very easy to lose track of where the money is going if all expenses are drawn from a single fund. The insecurity brought about by not knowing where the money is going can add stress to business owners.
2. Difficulty in auditing and declaring taxes. If all personal and business expense had been drawn from a single fund, it will be difficult to trace which amount had been used for which purpose. This is especially true if the business owner had not been keeping receipts or an organised book. Filing taxes will then be time consuming and pose a huge problem.
3. Misusing funds. There is a risk of mismanaging the money because the business owner may have a perception that the fund is endless. They may end up spending more for one than for another, favouring personal expenses over business expenses that would jeopardise the business.
One of the common traps Filipino business owners fall into is losing capital at the first few months of operating a business. This is because the owners fail to put a price ceiling on their start-up costs and instead overspend for unnecessary purchases regardless whether this purchase is a personal or business expense. But once operational costs start to pick up, the business owner will start using personal finances to fund for business expenses or borrow money to pay the bills.
Another pitfall is that Filipino business owners believe money will continuously pour in once their business is up. Because of this belief, there is a tendency to be lax in tracking expenses. There is also a desire to buy unnecessary items now believing that money spent now will be earned back anyway in the future.
Most business owners start out mixing their personal and business money to purchase items that are sometimes outside of priority. These dangers show why it’s important to keep track of each transaction or else you or your business will get shortchanged.
How you can separate personal and business finances
Here are some tips that will help you veer away from financial pitfalls and put an end to mixing personal and business finances:
1. Get two accounts. This is one simple way to finally separate your personal and business funds. Organisation of expenses for both will be easily monitored. Getting a separate account for your business also means clients can directly make deposits to the correct account with the proper tracking. In addition, having two accounts will instill the much-needed discipline vital to prevent overspending.
2. Install software for bookkeeping purposes. Softwares like QuickBooks and Sage can help you keep track of your incomes and expenses for both personal and business needs. In addition, having a clean accounting will help during tax month.
3. Give yourself a salary. Just because you’re the owner doesn’t mean the business money is endless. Your business also has its own needs that have to be met. Plus, giving yourself a strict, consistent salary will allow you to plan your personal and business expenses clearly.
Success takes discipline, and it all begins on how you handle the money that comes in and out of your business daily. Once you are able to organise how your money should be spent, then your business will flourish.