If you’re familiar with the game of cricket, then you can appreciate those tense final moments in a game when the ball is knocked clear past the boundary and the batting team has won. Instant jubilation for the winning team and their fans while that boundary ball has left the bowler, the rest of their team, and their fans silenced in utter disbelief. Similarly to the bowler’s displeasure, when the boundary line between business and personal finance is not established or has been dismantled, accountants weep. Ok, maybe we don’t actually weep but we are troubled by the legal, financial, and reputational risks to be had by the business and its owners when finances are commingled. This is unfortunately a very common practice mostly due to the fact that entrepreneurs lead a very busy life juggling multiple hats, but the consequences of those blurred lines create much in the way of unwanted headaches.
Why is it Crucial to Separate Business and Personal Finances?
Inability to Properly Track Business Performance:
In order to evaluate the financial health and performance of your business, comprehensible financial records are necessary. The absence of clarity hampers your capability to make cognizant decisions, create attainable budgets, and implement proper pricing strategies. The practice of commingling funds gives a false narrative of the profitability of your business.
Legal and Tax Implications:
Being able to accurately track your income and expenses can eventually lead to incorrect tax filings which is a precursor for fines and penalties from regulatory bodies. Some entrepreneurs give little consideration to this issue when their business is registered as a Limited Liability Company (LLC) or a Corporation, as both business types offer some level of protection where the business owner’s personal property is concerned. Sadly, when business and personal finances are comingled, that level of protection is threatened.
Professionalism and Integrity:
Commingling funds raises questions of integrity and stability for investors, lenders, and even your clients, and can contribute to a decline in your business relations as your ability to responsibly manage your own business finances corrodes their confidence.
Increased Complexity and Costs:
At the point where you are required to present financial statements to regulatory bodies, investors or lending institutions, the significance of commingling business and personal finances, will begin to weigh in. Trying to untangle the web of mixed funds and reconcile your accounts will not only be time-consuming and costly, but will take you away from running the core areas of your business to a more mentally taxing exercise.
How Do You Establish Clear Boundaries Between Business and Personal Finances?
Let’s explore some practical tips on how to draw the line between business and personal finances:
- Use separate bank accounts: Opening a separate bank account for your business activities and using that account for the purpose intended, is one of the most fundamental steps in safeguarding against the commingling of funds.
- Use separate credit cards: No, we’re not trying to encourage debt, but there are advantages to be had (eg. rewards, and fraud protection) when credit cards are used responsibly. However, having a separate credit card for your business allows you to properly identify and track expenses that are solely related to the business.
- Pay yourself a salary: Entrepreneurs have personal expenses and commitments, and as such, require a payday. A bad practice employed by many is to dip into business funds on a need-only basis, which encourages the commingling of business and personal finances. Determine a salary that is reasonable and suited to your personal financial needs as well as the profitability of your business and stick to it.
- Seek professional help: After hours of teaching bank reconciliation techniques and other business management tools to a client, he said “This is too time-consuming.” He was correct, and we agreed that his time would be better spent tending to the core areas of his business. Time is money, and sometimes hiring the services of an accountant can better position you and your business to set up clear boundaries to prevent the commingling of funds and realize greater profits.
In essence, creating that boundary between your business and personal finances can save you a lot of time, money, and headaches in the future. Commingling can be damaging to the financial success of your business and your overall peace of mind. By implementing sound practices, you can avoid the pitfalls of commingling funds and set yourself up for long-term success. At Avanopti, we are always ready to help you take control of your finances, give us a call today and see how we can help your business thrive.