A business despite being shaped and nurtured by the owner like its own baby has its own distinctive identity. The owner and the business cannot be considered one. But in cases of small businesses, important financial separations, being governed by the same person, are brushed off unnoticed. Personal and business finance become intertwined.
Record of income and expenditures is the factor which indicates the performance of the business and thus should be kept separate from personal financial records. The money line between the two should not be blurred otherwise it could create an unpleasant financial situation.
What could go wrong if your finances are intermixed?
Your business has its own identity and there are several reasons why their finances should not be interwoven with personal finances. If the thin line between them is crossed the consequences could be severe.
Risking personal assets
If small business owners mix their finances, their personal assets could become prone to risks. An outsider may claim personal assets for business liability and the business owner may not be able to evade it.
Complicated tax dues
If personal and business finances are intermingled, the business owner may have difficulty in calculating their taxable income. This may result in complications and the owner may have to pay penalties, fines, or higher taxes that can otherwise be avoided.
In certain cases, small business owners may assign personal assets under business assets to reap the benefits of depreciation and lower their tax liability. The case may be vice-versa also. This practice can be unhealthy for the business as the owner will never be able to apportion the assets separately.
An Unprofessional Approach
Clients, creditors and vendors hesitate to develop work relationships if they sense a lack of professionalism in the company Having separate personal and business finances is a sign of a healthy financial practice and professionalism. This gives assurance of the legitimacy and competence of the business allowing them to build a long term professional relationships.
When business cash and personal cash are not mixed, it is easier to manage the cash flow into the business and the creditworthiness of the business is more perspicuous. Since the financial investors can tell if both the finances are mixed up, credit agencies retreat in providing loans to businesses that do not have separate assets and liability checklist.
Maneuvering techniques to keep the finances apart
- Small business owners have to keep separate financial records for their business and their personal investments and expenditures.
- The bank account for the business should be separate and so should the debit and credit cards, so that payments and deposits of both the accounts go into and from the appropriate account.
- Drawing out a salary from the business account every month shall enable both the business account and the personal account to exhibit debit and credit accordingly.
- Services of a skilled financial accountant are mandatory as they can help give the right accounting treatment, categorizing expenses and preparing clear books of accounts.
Small business owners often muddle up between the two finances. They overlook that keeping separate accounts is rudimentary to success. To learn more about how you can keep your business and personal finances separate. Contact the experts at FFPCT here – FFPCT Business Finance Consultants and book a free consultation.