Did you know that 1 in 5 business owners do not have separate business and personal bank accounts in their business? For the 28.8 million small businesses in America, that amounts to 5.76 million small business owners whose finances are entangled and attached to the success and operation of their business. Regardless of whether your business is incorporated or a new venture where you find yourself working from your home, it is always advisable to treat it as a separate entity. Establishing a barrier between your personal and business finances is a key step owner should take to protect their personal assets, streamline their business accounting and monitor and control their small business finances. In short, if you want to give yourself and your business the best chance of succeeding in the future, you need to begin distinguishing between the two.
For Business Purchases, Use A Business Credit Card
Your personal credit history affects your chances of securing any business financing when starting your business or seeking additional financing. However, it is also important that you begin to establish a separate credit identity for your business and securing a business credit card is a great place to start. With a business credit card, you can then make credit purchases without infringing or increasing your own credit utilization rate. This means you are able to be to control your finances including your credit rating. Most credit cards also offer good fraud protection which is a common reason entrepreneurs tend to use credit cards. The key to getting this right is choosing the right card for your business’ operations and industry. This means choosing one that comes with relevant and beneficial rewards/ offers your business can act on such as promotional zero-rated purchase periods.
By doing this, larger purchases such as machinery, vehicles or even bulk stock can be purchased to keep your business going without putting too much pressure on you as the principal investor to fund it all by cash. Finally, securing a business credit card means you can accurately account for finance charges when doing the business’ annual accounts. This gives you a fairer, more complete picture of how your business is performing.
Treat Yourself As An Employee
A large part of separating your personal finances from your business’ finances is establishing that boundary. Over 83 percent of small businesses are financed with personal capital from the owners, and it can become quite easy to resort to using your own money or blending it all together when you need finance for your business. However, when you begin setting the same guidelines for yourself as you would an employee, you are essentially setting up safeguards to stop this from happening. Start with paying yourself a salary and separating your business profits from your personal annual profits. Set a percentage for profits as your annual return (alongside your salary) and assign the rest of it to a retained earnings account, which can then be used in the future for expansion plans or to fund tough business times.
Incorporate Budgets In Your Business And Personal Life Separately
Budgeting is a skill that everyone could benefit from- whether it is in their personal life or as an entrepreneur. However, it’s not just setting up a budget that ensures success but it is sticking to it. Having separate budgets makes sure that income and expenditure in both areas of your financial life are accounted for and minimizes the occurrence of cross funding/ commingling. Get started with an annual business budget, which can then be broken down into quarterly and monthly schedules. For your personal budget, be sure to include any monthly dividends, profits or salary you receive as the owner along with any additional capital you intend to invest as an expenditure. This makes it much more straightforward to see where your money is going and pinpoint problematic areas such as sources of debt if any exists.
Finally, budgeting is a great tool of financial control so having a budget for both aspects means you are able to be more in control of your spending in business and personally. This lessens the chances of overspending and having to dip into personal finances to fund business shortages or vice versa. When it comes to business and personal life, separation can be a good thing. This is particularly true for your finances.
Check out my guide on how to start your business right with tons of useful tips I learned by successfully starting, building, and selling multiple companies.