When starting up a small or medium sized business, many people borrow from family members, or use their savings. While this method is the only option for the majority of startups, it is also important that they realize that their personal and business finances need to be separated as early as possible. This way, you can see clearly about both your personal and business income and expenditures, and make better plans. Find out why you need to have two separate accounts.
1. Better Clarity of Your Finances
If you run a personal and a business budget and two separate accounts, you will be able to see clearly about your future. If you use your personal credit to fund business investments, you might have to wait until you get the money back, and cannot use the money to improve your life. Likewise, if you buy personal items on business accounts, you might not see clearly about how much your business expenses are, and how much profits your SME is able to produce.
2. Building Up Two Separate Savings
To stay safe, you need to build up personal and business savings, to cover emergencies. This means that if your business vehicle breaks down and needs to be repaired, you can use your business savings, and if you need to fix your HVAC system at home, you will have funds available through your personal savings accounts. If you mix up the two, you will jeopardise your personal or business finances.
3. Financing Laws
By law, you will not be able to include personal expenses in your monthly accounts and tax return. If you do so, you will face penalties. At the same time, if you have a business emergency and you apply for a quick personal loan, you will break the bank’s lending rules, and face higher interest, if you are found out.
4. You Can Build Business Assets
If you don’t let your personal debt interfere with your business finances, you will be able to build wealth and pay yourself higher salaries and takings from your business long term. If you keep on filling the gaps in your personal finance with funds from your business, you will never be able to invest in a way that you are building long term corporate assets, so your personal and business finances will suffer.
5. Lower Risk for Your Personal Finances
Some incorporation forms allow you to separate your personal and business finances, and choose not to have liability for the business’ debts and costs. This safe way will allow you to completely separate your personal and business life, but different taxation and financial rules will apply to each incorporation method. Choose your business form carefully, to manage your finances better in the future.
Startup business owners often fail to separate their personal and business finances, and this can have devastating consequences. Make sure that you are able to build up wealth without borrowing from your business, or you are reducing your venture’s growth potential. At the same time, don’t use personal finance to invest in your venture, and always keep two separate accounts.