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Finance & Accounting, Financial Management

The One Thing You’re Blowing in the Financial Management of Your Business

 

The One Thing You're Blowing in the Financial Management of Your Business

Running a small business is complicated, busy and constantly changing. Small business owners need to wear lots of different hats and fulfill lots of different roles to keep their businesses going. With all of the difficult tasks and complex situations that business ownership is going to send your way, it makes sense to try to avoid the simple mistakes. After all, if you can avoid the simple mistakes of managing your business, that will free up a lot of time, energy and resources to deal with the inevitable “big” mistakes, right?

But seriously, many business owners need to take a closer look at how they manage their business finances. One of the biggest “simple” mistakes that business owners make is failing to separate their business and personal finances. Many small business owners are paying invoices out of their personal checking account, taking clients out for lunch with their personal credit card and otherwise intermingling their personal finances with their business expenses and business income. This is a mistake! Using personal finances for business expenses (and vice versa) is a quick way to get confused, miss out on important tax deductions and ultimately endanger your professional reputation and the long-term viability of your business.

It’s an understandable mistake, but it still shouldn’t happen. If you’re serious about running your business like a real company, and not just as a side gig or hobby, it’s important to correct this simple mistake as soon as possible.

Here is why it’s important to keep your business finances separate from your personal finances:

Avoid Liability

One of the most important reasons to set up a legitimate business entity for your business – often a Limited Liability Company, or LLC – is that it provides some liability protection for your personal finances and personal assets in the event of a lawsuit or other misfortune. Don’t risk your home, your car, your life savings or other personal assets in case your business runs into trouble. Set up an LLC to protect your personal assets and personal finances. Setting up an LLC will enable you to get a business checking account and apply for business credit under your business’ name, instead of relying on your personal funds and personal credit.

Track Business Expenses

Do you know how much you spent last month on advertising for your business? What about the number of miles traveled for business meetings? How much did you spend on business travel – hotels, meals, etc.? If you don’t know the answers to these questions, it’s important to keep track of your business expenses separately from your personal expenses – with your own business checking account and business credit card. You can’t run your business efficiently unless you know how much you’re spending, and why – and it’s easier to keep track of business expenses if they’re not getting mixed up with your monthly grocery bills and your kids’ school lunch money.

Maximize Tax Savings

As a business owner, you can deduct a lot of your business expenses to reduce your overall tax bill. However, you can’t deduct a business expense unless you can track and substantiate it. The IRS doesn’t look kindly upon business owners who don’t have good records of their business expenses – and if your personal finances are mixed up with your business books, you’re more likely to make mistakes or miss out on a chance to claim a valid deduction that you deserved to have. Make your accountant’s life easier by separating your business and personal finances, ASAP.

Maintain Your Professional Identity

Another reason to separate business and personal finances is subtler, but still substantial – as a business owner, your business activities deserve to be kept separate from your personal life and personal finances. If you need to pay a vendor or take an important client out for lunch or rent office space, it enhances your business’ stature for the check to be written in the name of your company – not a personal check. Show that you’re serious. Get an LLC. Get a business bank account. Do it right.

You’re not really “in business” until your business has its own financial identity that is separate from your personal finances. Getting a business bank account and credit card, and tracking business expenses and paying yourself a salary from your business account, is all part of the process of setting up your business as its own separate entity that can grow and sustain itself. Your business needs to be apart from (and ultimately “bigger” than) you – separating your personal finances from your business finances is the first step in bringing your business fully to life.

Do you separate your business finances from your personal finances? Tell us why or why not in the comment section below.

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Kabbage Team

Kabbage is here not only to provide access to the small business funding you need, but to also help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.