Cash strapped small business owners may be tempted to mix personal and business finances for a temporary solution. The fact remains, however, that mixing personal and business finances makes it difficult to track business expenses and evaluate the financial health of a small business. Furthermore, when you buy office supplies with your personal credit card, you may miss out on certain tax deductions applicable only on business purpose purchases. Keeping your personal and business finances separate will also help you when preparing tax returns, income statements, and cash flow projections.
From opening a separate business account to using cloud accounting services and tools like the xero accounting software, you can take a number of steps to keep your personal and business finances separate. Here are some useful tips.
Establish a legal entity
First things first, select a legal business structure and register your business. Depending on your funding requirements, nature of business, and plans for expansion, you may want to open a sole proprietorship business, a Limited Liability Company, a partnership firm, or a subsidiary. Once you establish a legal entity, it would be easier to manage your business finances.
Open a separate bank account
You should have a separate checking account and a separate credit card for your business transactions. Be sure to use those every time you need to make any business transaction – no matter how small the amount is. Setting up a business account is the first step to achieve your goal of separating personal and business finances.
Clear up any confusion
There are situation where it could be difficult to tell whether you should use your personal or business credit card. Identify such grey areas and clear up any confusion about tax rules in your country. For instance, if your wife accompanies you in a business trip, you may wonder whether the expenses for your trip should fall under your business or personal finances. You can consult an experienced tax attorney to know what type of expenses qualify for business tax deductions.
Use accounting software
When it comes tracking expenses, it is important to keep your personal and business receipts separate. While an accountant can help in this, you should also use accounting software for tracking expenses in a more organized way especially when expenses involves multiple currency.
However, just using any software may not suffice. Most of today’s business owners need to manage finances on the go. They often need to travel and make purchases in a remote place. Hence, they need a mobile solution. As a small business owner, you should use cloud accounting services and tools like the xero accounting software that allows to key in expenses in the system anytime and from anywhere – as long as you are connected to the internet. You can give your team members access to your accounting data, while also having full control over which part of the data you want to keep confidential or don’t want to share with everyone. Practicing accounting transparency ease work flow in businesses.
It is also advisable that you should not pledge your personal property or assets for taking business loans.