Dear Entrepreneur,
Running a successful business often requires a clear distinction between personal and business finances. The blending of these funds can lead to serious issues like financial mishandling, tax problems, and more. In fact, for some types of businesses, keeping separate accounts for personal and business use isn’t just recommended – it’s a legal requirement. Keeping a clear line between these funds offers many benefits. It simplifies the task of calculating profits, fosters trust in your brand from customers, and makes it easier to assess the health of your business. This article aims to show you how to effectively separate your personal and business funds, and why it’s so important to do so.
Tips On How To Separate Business And Personal Funds
- Determine a structure for your business: The most crucial action you can do to separate your finances is to set up an organizational structure for your company. The legal framework of your company will essentially determine everything about it, including your risk and liability, whether you operate as a single proprietor, partnership or limited liability. The business structure determines the likely expenses as one who owns a sole proprietor business would spend less money than one who owns a limited liability company. It is important to conduct due diligence before making the decision on the structure of the business you want to register and once you do, it is important that you register the name with the Corporate Affairs Commission.
- Opening a Business Bank Account: After determining the business structure, the next step to open separate bank accounts for personal and business finances. Various financial institutions allow for business names and companies to open a corporate account after submitting the required documentation, which is your certificate of incorporation and signatories to the account. A separate corporate account helps to enforce accountability as the account manager or business owner can keep tabs at the end of the month by requesting a financial statement from the bank. It would also boost customer’s trust in the business once they know that payments for goods bought or services rendered are made into a corporate account instead of a personal account.
- Pay Yourself a Salary: Another helpful tip in separating business and personal funds is paying yourself a salary. This prevents business owners from considering paying personal costs with company cash and designates those amounts as your own payment from the company for your labor. A business owner may budget both business and personal money more successfully by setting aside a paycheck to cover your personal demands and costs. Business owners should strictly ensure that they pay themselves at the end of the month, which is deemed as their salary. The salary earned should strictly be adhered to and enforced.
- Budgeting: Also, budgeting is another helpful tip to separate personal and business funds. Budgeting means creating a financial plan either on a weekly or monthly basis. Poor planning may lead to you dipping into your personal resources, however, creating (and adhering to) a budget for your business will stop that. Of course, emergencies do arise, and even the best-laid plans for a budget might not always turn out as expected. Making a precise budget, however, lowers your likelihood of encountering needless expenses that can compel you to turn to your own funds for assistance. You can utilize technology or even the mobile application from your financial institution to set a budget. While business expenses cannot be predicted, adequate planning is essential.
- Bookkeeping: Another helpful tip to separate personal from business funds is to adopt an accurate bookkeeping strategy. As shared in our previous article on bookkeeping, bookkeeping can be outsourced or done electronically. Ensure you have proper records of financial expenses and audit your accounts regularly to be sure that the business is making profits regularly. Keep a record of all transactions and receipts for both business and personal accounts. This will help you keep track of business expenses for tax and accounting purposes. Any budget done without proper bookkeeping will eventually lead to many problems for the company. Records should be up to date and give a proper breakdown of cash inflow and expenditure.
Parting Thoughts
It is crucial, as a business owner, to separate your personal and business finances. Mixing the two can lead to confusion, financial disorganization, and even legal problems. We have highlighted some steps you can take to effectively separate your funds. First, open separate bank accounts for your business and personal finances and ensure that all transactions and expenses are clearly separated. Lastly, avoid using personal funds for business expenses, or vice versa. By following these steps, you can keep your personal and business finances in order and avoid any challenges that may arise from mixing the two.
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https://www.youtube.com/watch?v=THqcjqj4p8su0026t=23s