Why do people keep saying that it’s important to separate your personal and your business finances? It’s all just money, right? Why does it matter which bank account it’s in? Well, yes, it is all money, but it turns out there are a few pretty big reasons why you should keep them separate, despite the pain in the rear that it can be.
The biggest reason is definitely the IRS. If you ever get audited and you can’t clearly demonstrate, with supporting documentation, that your money went to business expenses, then the IRS will disallow them. What does that mean? Well, you remember all that tax that you didn’t have to pay because you took deductions? You’ll have to pay that. Now. All of it. Going back for several years. They’ll happily work out a payment plan with you, though.
Now, honestly, assuming you’re doing everything else right, your odds of being audited are actually pretty low, and I generally wouldn’t recommend making big changes to your life because of that alone. But, when deciding whether or not to react to something, there are two aspects you should always examine. How likely it is to happen AND how severe the consequences would be if it did happen. In this case, the former risk is pretty low, but the latter could potentially be very high. Plus, while separating personal and business spending is a bit of a pain, there are tons of other benefits to doing it.
Such as understanding the health of your business. How can you really know how your business is doing if you don’t know which of the trips to Walmart were for groceries and which were for business supplies? Which deposit was the sale you made and which was the money that Joey loaned you? Your business lives and dies on money. And if you don’t know where that money is coming from or where it’s going to how can you keep it alive?
Keeping a separate bank account for your business will let you get an immediate and clear idea of how much money you have on hand. You’ll be able to see trends of when and how much money you make. And, you’ll be able to easily see where your business is spending its money.
I think that is the most important mental change to make. That money belongs to your business, not to you. It’s not your money until the business gives it to you. If you can start to look at it like that, you’ll immediately have a better handle on your business finances.
If you are prone to overspending, either for your business or in your personal life, keeping business and personal spending separate can help with that. When you transfer money to your personal account, think of it as your salary. That’s all you have available for your personal expenses. That way, you won’t accidentally spend your grocery money on business supplies or vice versa.
There’s always the matter of image, too. It’s much more professional to be able to ask your clients to write a check to your business rather than to you personally. It may not matter much to either you or them, but the image that you create does have impact. And even if that impact isn’t largely negative, why let it be negative at all when you can easily turn it in to a positive?
For me personally, the most important reason to keep them separated is for the ease of your bookkeeping. You will be able to classify your spending much faster if you don’t have to wade through personal transactions too. And, it will be a lot easier (and probably cheaper) to have your taxes done at the end of the year, since your tax preparer will have access to accurate and complete numbers. And, just a hint, if you aren’t doing this, and your tax preparer isn’t wading through everything, then it’s likely that you’re leaving a lot of possible deductions on the table.
So, sure, there are lots of reasons to keep your personal and your business spending separate. It’ll make you safer in the case of an audit and it’ll make your business easier to run and quite likely more profitable right off the bat. So, I guess the question I have isn’t ‘Why should you separate your personal and your business finances?’ but why haven’t you?
For more information on how to improve your bookkeeping, check out my free report: 8 Ways to Spend Less Time but have Better Bookkeeping. Or, schedule a free consultation to see how The Serenity Keeper can help you keep your serenity when it comes to your bookkeeping.