If you’re a small business owner, especially a sole proprietor or LLC, you might find yourself reaching into your wallet to cover a business expense now and then. Or maybe you used your business card for a personal purchase because it was just easier at the moment, and vice versa.
You might be thinking, “Well, it all goes into the same pot.” But mixing your personal and business finances creates a financial maze that’s hard to escape and costly dead ends.
Don’t feel bad – you’re not alone! I’d say the majority of small business owners I’ve worked with were mixing personal and business finances.
Here are 13 reasons why keeping them separate is better for your business.
- Complicated Bookkeeping: Mixing expenses can turn your bookkeeping into a tangled mess. Your books should tell a clear story of your business’s financial health. When you mix personal with business, the story gets muddled, making it tough to track where your money is going and where it should be going.
- Inaccurate Financial Statements: The whole reason to review financial statements is to reflect your business’s performance. How can you analyze profitability, cash flow, and financial health when you skew the numbers with personal transactions mixed in? It just leads to poor business decisions.
- Tax Headaches: Picture this: It’s tax time, and you’re sifting through a mountain of receipts trying to figure out what’s what – and relying on memory can be tricky . By co-mingling, you risk missing out on deductions or, worse, over-claiming. Not fun!
- Loss of Business Deductions: Adding onto difficulties tracking business expenses, confusion around expenses can cause you to overlook valuable business deductions. This is lost opportunity to reduce your taxable income.
- Audit Risks: I’ve heard the IRS scrutinizes co-mingled finances more closely. An audit can be stressful, made even tougher when you’re trying to prove which expenses are genuinely business-related, increasing risk of fines or penalties. This is especially true if you haven’t keep good records with notations when needed (but this is another post.)
- Decreased LLC Protection: For LLCs, your limited liability protection hinges on treating your business as a separate entity. Mixing finances ‘blurs the lines’ and might expose your personal assets to risk if your business ever faces legal trouble.
- Increased Bookkeeping Costs and Hassles: When personal and business financial transactions are mixed, it results in more transactions for your bookkeeper to sort and categorize. This not only leads to more frequent questions about each transactions but also increased the time and effort required to maintain your financial records. This means higher bookkeeping fees and potential delays in getting your financial statements ready.
- Cash Flow Confusion: When you get accustomed to grabbing for any card, you might accidentally use business funds for personal expenses that lead to cash flow shortages for your business operations.
- Difficulties in Scaling: If you’re looking to grow your business, you DEFINITELY don’t want to co-mingle finances. Lenders, Partners, Investors all require clear financial statements, which are difficult to produce when accounts are mixed. This can lead to reduced access to financing or failed business deals.
- Efficient Expense Tracking: With separate finances, you can easily track business expenses, helping you identify areas where you can cut costs and improve profitability.
- Budgeting Challenges: Creating a budget is tough when you’re guessing what’s business and what’s personal. Clear separation allows you to see exactly what money is coming in and going out in your business. This makes it much easier to stick to a budget – one for personal, one for business.
- Professional Image: Sure, much of the time you’re doing business online and simply inputting card numbers. But keeping separate business cards and accounts shows you’re serious about your business, which builds credibility and trust.
- Easier Transition to Incorporation: If you decide to incorporate your business in the future, having separate finances will make the transition smoother. Clear records simplify the process of setting up a corporation and transferring assets.
So there you have it – 13 compelling reasons to keep your personal and business finances apart. Why 13? Because I was born on a Friday the 13th and I think it’s’ a great number! 😊
My personal preference aside, separating your finances can eliminate headaches from messed up books to tax troubles. Avoid this and you’ll have a clear view of your business’s financial health, helping you to make smarter decisions.
But wait – there’s benefits too! In my next post I’ll share some of the advantages of maintaining distinct financial boundaries. They’ll make you want to break your co-mingling habit and set your business up for success!
