The Importance of Separating Personal and Business Expenses
Precise bookkeeping is vital to any business of any size. Accurate accounting is the only way to get a good read on your business’ performance. To do this, it is imperative to separate personal expenses from business accounts. Serious complications can result if you do otherwise.
The first consequence of improper bookkeeping we tend to think of is the IRS. This is a very valid concern. Business and pleasure do not mix when it comes to taxes. An audit under any circumstance can feel like a nightmare. It will be even worse if you have used company funds to pay for personal expenses. If audited, the burden will be placed on you to validate that any expense in question, is in fact, business related. The proof needed would be receipts and invoices of these transactions. If you are unable to provide this evidence, you could be subject to penalties and back taxes. Neither of these will assist your business in being successful.
Accuracy of Financial Data
The other consequence to not separating personal and business expenses is the lack of accurate financial data. You will not have a clear picture of your business’s financial performance if your expenses do not reflect what is truly needed for operations. If you properly handle your financials, you should be able to run reports about the health of your business rather quickly and easily. But if these reports reflect incorrect data, you could be making inaccurate assumptions about the financial health of your company. Without these accurate reports, you will be unable to budget properly for your company or forecast future spending. Without a solid understanding of your spending, it will be challenging to understand if you can take on new expenditures, such as a large purchase or hiring a new employee. As your business grows, you may look to investors for a new product launch, or apply for a loan to purchase new equipment. To make these moves to expand your company, you must have accurate financial data to share. Sometimes you will need to hire a professional company like Booktied to manage the business’s finances.
The first step is to create clear and specific boundaries and policies. Your business should be as separate from your personal finances as possible. Most importantly, different bank accounts and credit card accounts will keep things transparent. Establish a procedure for monthly reconciliation to ensure all expenses are, in fact, business related and classified correctly. Avoid the “gray area” by keeping business lunches and other work activities separate from events with friends and family. If you haven’t been doing the best job of keeping personal and business expense separate, now is the time to start. While it may seem like a headache and time consuming, the problem will only grow the longer you leave it unresolved. Set aside the time and get your bookkeeping in order. There is no easy fix for it. Do the best you can with the information you can recall.
In the future, if you do accidentally pay for expenses out of the wrong account. Rectify the situation as soon as possible and be sure there is a paper trail to show the documentation. Expense tracking shouldn’t be a burden and will be more straightforward with clear separation of accounts. Understand what is a business expense, and only use company funds to pay for these. In the long run, keeping business matters separate is more efficient. You will spend less time cleaning up your bookkeeping, allowing you to spend your time on revenue-generating activities.