Business and Personal Finances: Keep Them Separate for Financial Success
Business is personal—that’s what they say, right? As a small business owner, you know this to be true. You pour your heart and soul into creating your products and services, and your entrepreneurial spirit is the engine that keeps everything running.
When you run your own business, the line between what’s personal and what’s business-related can blur. Just consider the following scenarios:
You transfer money from your business bank account into your personal account
You purchase household items and business supplies within the same transaction
You create a personal household budget based on the income you bring home from your business
Sound familiar? In all of these instances, your personal and business finances are intertwined. And why shouldn’t they be? Your business is probably more closely intertwined with your personal life than any job you ever had working for someone else. It’s natural that the line between your personal life and your business sometimes gets blurry.
But when it comes to finances, you’ve got to draw the line. Yes—your business and personal finances are intimately connected, but as a successful small business owner, you need to keep them separately organized if you want to live with financial ease.
Why Is It Important to Separate Your Business and Personal Finances?
Running a business takes a lot of work, and financial stress or confusion can distract you from important day-to-day tasks. Keeping your business and personal finances separate can provide ease in several areas of both business and life, including liability, taxes, and day-to-day organization.
Liability
When you start any business, you take on some risk. But by legally separating yourself from your business entity, you can minimize the financial risk to your personal assets, including your personal savings, retirement savings, and investment accounts. Structuring your business as an LLC or corporation, for example, separates you and your personal assets from those of the business.
This means that if something happens and the business is at fault, you (and your personal assets) generally won’t be at risk if someone sues you (or at minimum are harder to get to with that extra layer of protection!). But if you mix business funds with personal funds—even accidentally—you risk losing the security you’ve built. Keeping your business finances and transactions totally separate from your personal finances is important for maintaining this security.
Taxes
Come January, taxes are on everyone’s mind, especially when you’re a business owner. Maybe you have a tendency to procrastinate reaching out to your accountant for tax planning advice, or perhaps you simply fear doing your taxes wrong. You might even feel shame around your finances when tax time forces you take a closer look—no wonder taxes cause stress!
As a business owner, you’re responsible for paying income tax and self-employment tax. Separating your finances lets you clearly see your revenue and business expenses, which you’ll need to know when making estimated quarterly payments and when filing your annual taxes.
Separating business and personal finances makes tax-related tasks so much easier and you reduce the risk of missing important tax deductions to reduce your tax liability. Personally, I’ll do just about anything to make filing taxes easier—how about you?
Profitability
Believe it or not, using separate accounts can actually help you to be more profitable. You see, business finance isn’t all about the debits and credits - there’s so much behaviorally induced about money that simply keeping separate accounts can help you make wiser financial decisions with increased clarity.
In short, understanding Parkinson’s Law can greatly help you understand more about how separate accounts can help you become more profitable. Parkinson’s Law is “Work expands so as to fill the time available for its completion”. The same is true for time, product and you guessed it, money. You can learn all about this part of separate accounts by checking out ‘Why Profit First Works in My Business and Will Work In Yours Too’.
Organization
Finally, separating your finances makes life—both daily and at tax time—so much easier. With separate finances, business bookkeeping is more straightforward. You’ll have a clear view of how your business is doing. Being aware of your business’s profit and cash flow helps you make projections, know what you can invest in the business, and of course, pay yourself accordingly.
When you know the intimate financial details about your business, you’re better able to make strategic decisions to grow your business profits, and managing your personal finances becomes much easier. Plus, a focused picture of both business and personal finances is an important step in building financial confidence.
How Do You Keep Business and Personal Finances Separate?
If you haven’t been keeping your business and personal finances separate, the untangling process might feel like a bit of a headache. But taking a few simple actions can help you stay organized year-round.
Use Separate Bank Accounts
Opening a designated business bank account is the easiest way (and a critical one) to keep your finances separate. Open an account for your business and use it for every business transaction. All revenue should be paid into the account and all business expenses should be paid out of the account. The business account should never be used to pay for personal expenses. If you really want to take things to the next level, use multiple accounts in your business for maximum clarity.
It sounds simple, and it is, but it makes all the difference. The alternative? Sifting through all your monthly bank statements and receipts to try and pick out your business expenses from the long list of personal transactions. Let’s be real: no one has time for that.
Don’t Forget to Pay Yourself
It sounds obvious, doesn’t it? But a lot of business owners struggle with paying themselves consistently, fairly, or at all. It’s awfully tempting to just keep reinvesting in the business, but you need to have a strategy for paying yourself to avoid burnout. Your own wellbeing is also an investment in your business.
Remember how you need two separate bank accounts—one personal and one for business? Having these two accounts means that the money your business is earning is coming into your business account, and you won’t see any of it if you don’t pay yourself.
How and how much you pay yourself depends on a few things, including your business’s structure, its performance, and your personal needs. The important thing is you make it a habit to pay yourself, and adjust as needed.
Create a Budget for Each
You probably have strong feelings about the B-word—that’s right… Budgeting. While creating either a personal or business budget takes some effort on the front end, the payoff is huge. Knowing your income and expenses, reaching savings goals, and maybe even paying off debt are all benefits of a great budget.
Having two budgets—one for your business and one for your personal finances—helps you keep everything organized. If your business is your sole source of income, it’s going to play a heavy hand in your personal budget. And to make sure you’re reaching your personal and business goals, you need separate budgets to help get you there.
How to Manage Both Business and Personal Finances
It can be really tough to keep business and personal finances separate. After all, sometimes it feels like your life and your business are one and the same. But I promise, getting a firm grip on both your personal and business finances, understanding how they’re related, and keeping them separate will help you live with more ease and confidence.
If you need help getting your personal and business finances in order, you might benefit from working with a financial coach. A financial business coach can help you make sense of your personal finances and your business finances, create a business budget, pay yourself, and ultimately, run your business with confidence.
At Financial Fitness Coaching, I help small business owners tackle business and personal finances. To see how we can help you and your business, email me at kristen@financialfitnesscoaching.com or simply schedule a free 20-minute Discovery Call on my calendar.