Why you need to seperate your Business and Personal finances
Whether you’re a small business owner or a sole trader, you know how easy it can be for your personal and business finances to start crossing over. As experienced bookkeepers, we want you to understand how crucial it is that the two do not mix.
Why you ask? Because it allows you to clearly evaluate business performance. Greater transparency will allow you to track business expenses easily, improve accuracy of business forecasts and tax planning (no unexpected tax bills) thereby having greater control over cashflow.
Yes, the set up can be time consuming but trust us, it’s worth it! The benefits far outweigh the short time disruption. Come tax time you will grateful you did. Tax preparation will be simpler and time efficient. The clarity gained by keeping personal and business transactions separated saves on both time and money. If you’re a busy entrepreneur, you can’t argue the value in that.
The next big question is How? And what if your personal and business finances are already entangled? We’ve got you covered. Gecko has 5 tips to get you started and on the right track.
1. Use Separate bank accounts.
This may sound obvious but having a separate account for your business is fundamental. Even for small one-man-band operations, it is important to track professional incomings and outgoings distinct from your own.
Transaction segregation removes the implications of weeding out personal transactions over business ones come tax time.
Already using accounting software? Great! Connect your designated business bank account so only business transactions feed straight into your accounting file. This keeps business transactional history clear of any personal record keeping.
2. Digitise your receipts
By law, you need to provide written evidence of your income and expenses. As such, it is imperative you keep and organise your business receipts. This does not mean keeping them in a shoe box (or an electric Wok as we have seen) left to fade or rip. There are some great digital solutions available for receipt storage.
Without a doubt, a digital solution is the best way to store your receipts. You can hold them as long as you need, mitigating the risk or losing or damaging business relevant information. It means your accountant and bookkeeper can easily differentiate business purchases from personal ones and access them easily at any time.
There are many great tools that digitise and store your receipts safely. Some of the market leaders are Dext (formally ReceiptBank) and Hubdoc, both integrate seamlessly with Xero software. For any sole traders not currently using accounting software, we believe the ATO ‘My deductions App’ is the best solution. From the app, you can take a photo and upload your expenses directly into your tax return or share via email with your accountant. Keep an eye out for next months blog post where we cover all that is the ATO's My Deductions App!
Other free applications are ‘To PDF’ and ‘Camscanner’, both excellent tools to shoot, store and file receipts quickly and efficiently.
3. Purchase Business Items Separately
Where possible, keep the purchase of business assets such as computers, phones and motor vehicles separate. This makes reporting business expenses distinct from your own much clearer. Depending on business scale, this can be a little tricky. As in the case of motor vehicles, you may need to track actual business use. Fortunately, there are alternative solutions that help keeping track of business use much easier. There are apps for mobiles and laptops that you can use to track your time while using for business purposes. For cars, you can use a physical logbook or use one of the many apps such as ‘Drivers Note’ that keep track of any business journey you make. At a low cost, some apps automatically pick up your movements as you start driving and ask you whether your trip is personal or business!
4. Set a Budget
Ideally, you want to avoid topping up your business cashflow with personal finances or have your business foot the bill for personal expenses. To mitigate this risk, create a budget and stick to it. Budgeting ensures funds are correctly allocated and helps you take control your spending, track expenses and save money.
5. Hire a Professional Finance Expert
If you require assistance or just need some guidance on separating your personal and business finances, consider engaging an expert like an accountant, bookkeeper, or both! Building trusted relationships with these professionals can provide expert advice, helping you manage your finances to create a more sustainable long-term business structure and enable pathways to future growth opportunities.
Separating personal and business finances is vital for all businesses, big and small. Not only does it provide you with greater clarity on business performance, but it also saves time and money and serves as a solid basis for future scalability. You can clearly see the progress you have made and identify opportunities for growth, change or adaptation.
If you can implement these few changes, you will have a more enjoyable time growing your business.
Starting to think you need assistance separating your personal and business expenses? Reach out to Gecko Bookkeeping for support.