Anyone who knows anything about management will tell you that managing more than one task at a time can be mind-boggling. This cannot be any more true in the case of finances. Handling one set of transactions and finances can be daunting; having to manage two is just exhausting. If there are any two things in the world that don’t mix together, it’s your personal finance and business finance.
If you run a business, then you will inadvertently face the dichotomy that comes with having two sets of finances to deal with. Here are a few ways in which you can separate your business earnings from your personal finances and manage both effectively.
To fully understand how you can keep the two separate, you must first understand why you should be doing that in the first place.
1) Tax Deductions Simplified!
Incorrect tax collections are a given if you mix your business and your personal accounts. The worst case scenario here is that you end up paying more tax than you need to. This will happen if your non-taxable income is accidentally taxed as part of your financial income. The reverse is equally possible and just as bad. Slacking off on tax payments may result in penalty charges you don’t want to pay.
2) General Confusion
When it comes to money, confusion isn’t what you want to feel. You may look back on your bank transactions and cannot remember which ones were for personal and which ones for professional/business use. You’re going to panic. Avoid all of that by keeping both those sets of transactions separate.
3) Keep an Eye on Your Money
If you have a bank account that combines your personal and business gains, you’re likely to see a very friendly number up on the bank account. This might sound simple, since you only have to look at one account, but can spell disaster for you since you won’t know how many funds are for personal use and how many for business purposes.
Now that you know the value of keeping these different funds separately, you can start with simpler ways and move upward, depending on how well your business is doing.
1) Keeping Separate Bank Accounts and Credit Cards
This has to be a simple no Brainer! Simply keep two different accounts, one for your personal use and one for all your business transactions. This will show you two different cash flow patterns and you’ll have more control over how much money goes where and from which account. This is a basic step in channeling your funds. If you avail a Instant Personal Loan for your personal use then it is important to have a different account to monitoring EMIs to paid. The credit cards would help you simplify payments, both personal and business. Best part about this? You get to measure your tax returns, one account at a time.
2) Get a Salary
‘Why do I need a salary if I own the business?’ You might wonder. Well, this is a simple concept. If you give yourself a fixed amount every month for your personal expense, instead of arbitrarily taking random amounts of cash, you’ll understand your profit and loss better. Besides, if you take a fixed amount, you can cap your expenses too! This helps with budget restrictions and channels all your remaining profits into your business.
3) Take Professional Support
Accountants are a great idea if you find yourself overwhelmed with the sea of financial worries. They will help you understand and organize your funds, such that you know the best way to approach them. They’ll also help you manage your time better and understand things such as taxation impacts and accounting treatment.
4) Truly Establish Your Business
Get yourself a trustworthy team of attorneys and lawyers and set yourself apart as a Private Entity, Limited Liability Company (LLC) or a Partnership Firm. Find out whichever works best for you and the nature of your business and how it will go on to impact your finances and taxes. Another reason to have this kind of an established business is that it helps sort out legal complications, which you may get into as your business grows.
5) Don’t Mix up Personal Use and Professional Use
Yes, that coffee shop you took your new employee to, can be written off. So can the extra fuel you pumped your company car with the other day. Small business owners know that the same flight ticket that takes them home also gets them to the annual meeting.
Keep in mind that any expense that can be legally written off, must be written off. Be true to yourself and to your business. This will help save you money when the final tax is being calculated. Find an advisor to help you determine what can be cut off and what can’t.