5 Tricks for Keeping Business & Personal Expenses Separate
There are so many perks to being a business owner - being your own boss, setting your own hours, being fully dependent on yourself…the list goes on!
With the pros come the cons, and a big challenge for a lot of business owners is figuring out how to manage their finances, specifically separate from their personal finances.
If you are a solopreneur, it may feel like so much of your business and work life is intertwined. You may work from home, take personal/business trips, or have a computer that you use for managing sales just as much as you use it to update your Facebook account.
The lines can sometimes feel blurred but there are a few tricks you can use to ensure you are keeping your business and personal expenses separate.
Why is This Important?
Running your business's finances is so different than your personal finances. With your personal finances, no one is going to ask how much you spent on groceries in a year. You typically have only a few sources of income and expenses will be fairly predictable.
When it comes to your business finances, you will want information on:
What expenses are tax-deductible
How much profit did you earn
What services or products were the most profitable
Do you have enough cash coming in and out to make big investments
To get these answers you need to isolate the income and expenses that specifically relate to your business.
To do that, here is where I recommend you start:
1. Create Separate Accounts
When you start your business, one of your first steps should be to create a separate bank account.
This is going to be the easiest and most essential step!
Doing so will keep all transactions and bank statements separate so you can easily make sure all the right income and expenses are included.
2. Separate Receipts
Let’s say you are at the store and you find a few things you would also like to grab for work. You don’t have your business card on you, so you purchase the combo personal and business items with your personal card.
Keep your receipts and next time compensate yourself, include an expense report with those specific business items highlighted.
In your bookkeeping software, you can then separate those expenses into the appropriate accounts.
3. Treat Your Account Cards Like You’re an Employee, Not an Owner
I know it may be easy to use your business card in a pinch but use your account cards like you are an employee. Assume your boss has a list of approved expenses and they will see everything you purchase - yes, including the Starbucks run!
While you may be able to charge Starbucks to your business, your bookkeeper needs to understand the difference between a business meal and a personal meal. There is a big difference that could affect your taxes.
This is just one example, but it shows why you should be strict with yourself and know when to charge your business account.
4. Pay Yourself
You make a lot of sacrifices for your business, you should get paid - period!
However, we know sometimes it is not always practical. Sometimes you need to forgo a paycheck at the beginning or when times are tough.
It happens but these scenarios should be temporary.
Work with a bookkeeper to make sure you are profiting from your hard work and creating structure.
Otherwise, it can be a lot more tempting to dip into your business accounts when the need strikes.
5. Know How to Define a Personal vs. Business Expense
As we mentioned earlier, the line between business and personal can sometimes be blurry. So here are two words to keep in mind: ordinary and necessary
If an expense is ordinary and necessary for another business just like yours - it’s a business expense!
Ordinary:Expenses that are normal within the course of business. They are not lavish or unexpected for your type of business.
Necessary: Expenses that are needed to provide whatever product or service you are offering.
Financial reports can seem like a headache and not the most important task that needs to get completed in your business…
But when you have big questions about how to move forward or tackle problems, oftentimes your financial reports can provide you with the answers you need.
If you are looking for help setting up your business with the proper process to keep business and personal expenses separate, schedule a discovery call by clicking here. We are here to help.