As a business owner, it is important you don’t take your finances lightly. Most business owners make the mistake of mixing up their business and personal finances thereby unable to differentiate their business and personal expenditures.
A study by the U.S Bank as highlighted by the Hartford Small Biz Ahead stated that 82% of businesses fail due to cash flow mismanagement.
If you’re the type that combines your business and personal cash flow, your business is fast heading to early bankruptcy. To save your business from this doom, the best approach is to separate your finances.
In this article, I will share the reasons why separating your business and personal finances is good for your business.
But first, let’s dig from the basics.
What Is The Difference Between Business Finance And Personal Finance?
Business finance is the fund you used in the strategic and operational running of your business. It’s the amount you’re raising and managing in the areas of planning, control operations, and your financial structure while personal finance covers managing your money, savings and investment. It also comprises your budgeting, banking, insurance, etc.
That said, it is also important you consider your business as an entity that is capable of surviving on its own. In a way that it has, its own accounts, investment, budgeting, etc.
Why You Should Separate Your Business and Personal Finances
Separating your business and personal finances is important in many ways, here are 7 of them;
1. It helps save time and money
It is important you let your business account to sort your business expenditures and your personal account does the same.
This will help you to better track your business expenses and help you or your accountant to record your cash flow in an organized form. This act is necessary for accessible fund analysis and management.
When you have your accounts all organized, you’ll save time and money for sorting your finances, and when your business grows to the stage that you hire an accountant, the job will be less stressful for him.
Saving time and money will mean that you are able to invest your energy in other business-productive activities.
2. It helps achieve financial stability
Having a business comes with its own risk. You can’t be sure about when you’ll attain the break-even point despite investing diligent works. You only keep your hopes high while being consistent with the process.
So when your business downtime hits, separating your business and personal finances will help you spot the tsunami and immediately adjust your expenditures. This difference will guide you whether to reinforce your business with your personal finances or let the business help itself.
And when you seek funding or financial support, only a business account can stand in for you, else every investor will believe you’re using the money for something else.
3. It makes auditing easy
Every government utilizes business audits to evaluate the viability of a business and its likely economic benefits. They do this because it is important to ascertain that the business complies with the standard of doing business in the state.
If your business and personal accounts are jumbled together, your business expenses will be difficult to scan through. And that will create a wrong perception of you as a business owner.
However, when you have your finances as well as supporting documents are intact, your auditing process becomes easier and your tax returns and financial reports are well examined.
4. It reduces your business tax rate
Having clean and easy-to-understand financial records could help you reduce your tax rate. This is possible because your auditing process will be simpler and the auditor will be able to spot your financial model.
That way, your business won’t mistakenly pay for what your personal maintenance which may include rents, transportations, and other business expenses.
5. Ease the borrowing process of business credit
Many businesses survive on loans and credits. They access these when they need to execute a project or want to stay afloat during hard times.
But obtaining business credit isn’t child’s play. Your financials must be solid and well-articulated, if not, the bank will disregard your proposal.
The agency or bank needs to be sure that your business can survive without your money. So having a separate account makes it easier for the agencies to give you loans. They can easily visualize your business sustainability and how you’ve managed money in the past years.
That trust currency will enable you to access the actual capital to grow your business.
6. It enhances your professional identity
Customers and investors do not want to conduct business with companies that are treated as hobbies. They want to work with you when you take your business seriously. They want to see how professional you are and they want a clear belief that you and your business operate as different entities.
If you don’t have separate accounts for your business and personal expenses, it will tell on your business. The investors will see the business as mainly a play, and they won’t toy their money with it.
Besides establishing your professional identity, it positions your business as a respected entity that clients and investors can work and associate with.
7. It prevents your business from bankruptcy
Ultimately, separating your business and personal finances prevents your business from bankruptcy. You will enjoy the ease of accessing funds, and business support.
Aside from that, it also guides the way you dip your hands into the business account. This is true because you’ll clearly identify when you’re crossing the business-personal account line. And save you from likely debt.
Now that you understand the importance of separating business and personal accounts, you should test your financial literacy, and have a good way to earn legal protection.
Even your employees will respect the money flow, as all money transfers will be made according to specific protocols, including salary, dividends, and other distributions, rather than in an arbitrary fashion.
The Enugu SME Agency has created some videos on financial literacy for business owners that you can access here and here.
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