If you run a small business, you may be wondering how to separate personal and business finances. Here, manager at tax advisors Howlader & Co, Chris Kelly, tells readers how to do it.
When you first start out in business it might seem easier to keep the two mingled together, however you should always separate personal and business finances, as it can cause problems further down the line if you don’t.
Before we look into how to separate personal and business finances, well explain why you should.
Itll make completing your tax return easier
HMRC advises company owners to separate personal and business finances, and it’s not just because it makes things easier for them.
When it’s time to complete your tax return, having separate personal and business finances will make it much easier to identify and include all the right income and costs in your accounting.
Mistakes in this area could mean you pay more tax than you should, or end up underpaying, which could result in significant penalties.
It’ll saveyou time and money
Keeping separate personal and business finances will make your accounting and bookkeeping simpler and quicker.
If your finances are mixed in the same account, either you or your accountant will have to waste time sifting through it to find your business transactions. As the old saying goes, time is money.
Youll avoid cash flow problems
If you manage your personal and business finances in the same place, you risk losing track of how much cash you actually have available for each.
For example, you may see a healthy bank balance and decide to splash out on a holiday but then get hit with a business expense you can no longer afford a couple of months later.
By having separate personal and business finances, youll avoid accidentally spending business money on personal purchases.
How to separate personal and business finances?
As you can see, keeping separate personal and business finances is a no-brainer. It makes managing your accounting and cash flow much easier, and will help you avoid nasty repercussions further down the line.The followings steps explain how to separate personal and business finances.
Create separate bank accounts
This is the most important step towards having separate personal and business finances. If you havent got a separate business bank account, get one now!
Not only will it make managing your business finances easier, it will protect your personal assets from anything that might happen in your business. Be strict about using this account for business purposes only. That way, it will be easy to gain a clear and accurate picture of your company’s income and expenditure.
Become a limited company?
Depending on the nature of your business, it may be beneficial to run it as a limited company (if you arent already). A limited company is a distinct entity from its owners. Everything from the company’s bank account to its ownership of assets is completely separate from the interests of its shareholders.
Youll also have the reassurance of limited liability. This means you won’t be personally liable for any financial losses your business makes (assuming no fraud has taken place).
Get a business credit card
Things can get complicated if you use a personal credit card for business transactions. Getting a specific business credit card will allow you to clearly delineate between personal and business expenses, and help protect your personal credit score from anything that happens in your business.
Likewise, using a credit card in the name of your company will help you build stronger business credit (assuming you pay your bills on time). A strong credit score will give your company credibility and better borrowing power.
Pay yourself a salary
Rather than dipping into your company’s coffers whenever you need a top-up, treat yourself like an employee of your own business.
Pay yourself a salary from your business bank account into your personal one. If you’re running low tighten your purse strings and hang on until payday.
If you’re serious and you know you want to separate your personal and business finances, the demarcation needs to be constant and complete.
Eliminate grey areas in your expenses
Be clear about what qualifies as a business expense, and what you use for personal purposes when you separate personal and business finances. For example, if you buy stationery for your business, don’t then use this stock to replenish your home supplies.
Keep careful track of any business use of personal items – if you use your personal car or phone for business purposes, be stringent in recording when and how much you use them.
Maintaining separate personal and business finances will bring distinct advantages for your company, and will help you avoid potential problems later on. It only takes a few small changes to make the distinction, so put the wheels in motion today!
Chris Kelly is assistant manager at Howlader & Co, an established accountancy and chartered tax advisory practice. The cash struggles business owners have with new notes and coins