Having separate finances for your business will not only simplify your overall financial management process, it can also help stop potential problems before they appear, saving you many headaches in the long run. Keeping track of all the comings and goings of a business may be difficult at times, but it’s an essential step toward long-term growth.
Here are five steps that business owners can take to separate their personal and business finances, building a better and more efficient business.
1. Establish a Separate Legal Entity
The first step toward separating your personal life from your business is to ensure that each is its own legal entity. Oftentimes, this will require some outside legal advice to find the best solution, but the Small Business Administration might be a good place to start. If you haven’t already, you also need to apply for an Employer Identification Number from the IRS.
Establishing a separate legal entity is an essential step to protecting yourself as a business owner. In doing so, you’ll be able to separate your personal and business assets, ensuring that the loss of one does not necessarily result in the loss of the other.
2. Checking and Credit
Once you’ve separated your business’s finances on paper, it’s time to separate them in practice. The first step is to open a separate checking account for your business that operates independently of your personal account. This will help you get a clear overhead view of what’s coming in and going out of your business without being cluttered with all of your personal expenditures.
Likewise, with a business checking account, it’s wise to also get a business credit card. Beyond the advantage of making financial reporting easier, getting a separate credit card also protects your personal credit score from the many expenditures that come with being a small business owner. You’ll also begin building good credit for your company, increasing its legitimacy and making it easier to secure loans and funding in the future.
3. Expense Tracking
Even with the proper systems for separate business finances in place, they won’t mean much if you don’t stay on top of them.
A good first step is to start saving receipts for every business purchase. You might be able to check bank statements later, but having a physical copy in a dedicated folder is a great way to take the numbers off the page and give them weight. Obviously, dedicated record keeping also makes tax prep that much easier and protects you from the IRS should you get audited. Just make sure to keep business and personal receipts in separate folders.
Take note of shared business expenses, many of which are tax-deductible. Likewise, track every time you use a personal item for a business purpose. Anything that can be written off should be.
4. Employee Education and Training
It’s not enough that you know the difference between personal finances and those of the business: every part of your organization should have a clear understanding as well. Stay on top of financial recording and reporting, don’t cut corners or take shortcuts, treat the company card as “hands-off” for any personal expenses, and make sure all of your employees share the same level of discipline.
It’s important to also remember that, even if you are the business owner, you are still an employee. Your paycheck should come from the company, and should be recorded in the same manner. Even if the going gets rough, resist the urge to use the business card for personal matters, as it will only cause more problems in the end.
5. Find a Great Accountant
While these first steps can be a great start for business owners looking to gain full control over their business’s finances, they are not enough to reach maximum efficiency.
Ultimately, every business will need an accountant to make sure all the numbers are solid and that the business is seeing maximum returns. But to truly thrive, a business needs more than an accountant: it needs a dedicated financial advisor that can give the owner a firm understanding of their present position while helping them plan for the future.