BusinessExpert AdviceFinance

Why You Should Separate Your Personal & Business Finances (and how!)

As a small business owner or sole proprietor, it can be very tempting to keep your personal and business finances intermingled. While many small businesses have already applied for Paycheck Protection Loans as part of the CARES act, the advice to separate your business and personal finances is more important than ever before. 

Here’s 5 reasons why, followed by how you can make the switch…

1. Separate accounts allow for clear reporting (especially if you’ve applied for a PPP loan)

In a normal year, clear and distinct accounting ensures you can create equally clear and accurate year-end financial reports. On a basic level, you simply can’t determine your true income or loss if you can’t track every expense with ease. 

But what about an abnormal year? As business owners around the world are learning, it’s the irregular times that benefit from good planning and solid processes the most. A great example of this advice in action is how businesses are working to guarantee Paycheck Protection Loan forgiveness by diligently separating accounts.  

Retailers need to be extremely thorough when it comes to tracking expenditures in order to get the full loan forgiveness. To make things easier, I’ve created a new account to track every expenditure tied to my Paycheck Protection Loan to better track everything and make the process easier.

A member retailer in Jenison, MI

As you can see, when times get tough. This basic measure could mean the difference between a valuable life preserver and an expensive mistake. 

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2. Business analysis is impossible with muddled data

Looking for another reason to clean up your accounts? Without a clear separation of business income and expenses and personal payments, you won’t  even come close to being able to analyze your business growth and trends. You will have no idea how much you actually spent on utilities or office supplies or business travel.  You won’t be able to measure the ROI of your newest marketing approach. And you won’t be able to make solid budget plans for the future. At the end of the day, you won’t be able to determine how much your company actually grew if you’re not sure how much you really made.  

3. Ease of Acquiring Credit

Your personal credit score will be evaluated as you apply for business credit, but often it’s easier to secure if your business is a separate entity. As many business owners are learning in 2020, maintaining your business as a distinct entity makes the entire process easier and less daunting. 

4. Time is money, too

After the initial time investment on the front end for setup, keeping personal and business finances separate will save you hours and hours of time – especially when you would rather spend your time on making plans for new growth or overcoming the next obstacle. 

5. Come Tax Time, You’ll be Happy 

You are required to file taxes for your business as well as individual taxes. Based on the type and size of your business, your required tax payments will vary. But no matter if you’re paying estimated taxes quarterly or annually, it will be incredibly confusing to determine tax liability if your numbers are jumbled together in one bank account. Add-in the presence of funds from 2020’s PPP and EIDL loans, and things can get confusing – fast

Imagine being audited by the IRS and trying to piece together receipts, bills, and more for your business vs. personal? If they’re all jumbled together, you’d be in trouble – with double the work to dig yourself out.

Here's How to Fix It

If you haven’t already – now is the time to separate your accounts. If you don’t already have one, get a company credit card. Open a company bank account, and get your transactions running through business accounts only. Get a business email if you don’t have one (not only will it help you keep business & personal separate, but it will be much more professional looking than a @gmail or @yahoo email address). 

If you have a tax expert or accounting professional, ask their advice. Then start looking at your business’s financial reports. It will be tricky for a few years without any prior data to compare to, but you have to start somewhere. Start now!

Exclusive for Members
For your business, take advantage of your payroll tools

Services like ADP offer comprehensive HR and payroll functions that streamline tracking and reporting for payroll, benefits, and much more. As a business owner, if you’re doing your own accounting, billing, and payroll – outsourcing these functions can be an easy win when it comes to protecting your business, saving time, and cutting costs. Learn more in Why You Should be Outsourcing Your Payroll (If You’re Not Already)

For Your Personal Finances

Check Out is a popular tool for a variety of reasons. Not only does it allow you to link in any personal bank accounts, credit cards, loans, IRAs, cars, mortgages, and more, it lets you categorize each transaction for personal finance reporting, analysis, and budgeting. We couldn’t recommend it more.

Take our word for it. With your personal finances separate from your business finances, you will save time, have an easier time performing business analysis, and be in a position to think strategically about future growth.

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