Every successful business owner knows that they have a lot of things to juggle on a daily basis. And when you have a lot happening, it can be easy to let certain parts of your business get disorganised or messy.
One area of business that can be challenging to manage is the convenience of combining personal and business finances. Many business owners don’t realise the impact of merging both which can lead to confusion and not having a clear understanding of actual business expenses and profits.
This perceived convenience for small businesses or those just starting out tends to lead to financial confusion for business owners.
In this article, we will look at ways to navigate this area of business.
1. Know Your Business Expenses
The first step to balancing personal and business expenses is having a real understanding of all the business expenses.
Keep your books up to date so you can see what it costs you to run your business and to be able to separate costs. This includes your fixed and variable costs and also your costs of goods.
Knowing these expenses in your business will help you to budget both on a personal and business level. If you need help understanding the real expenses of your business, then look to hire a good bookkeeper and accountant to guide you with the proper set up and ongoing tracking.
2. Pay Yourself A Wage
Ensure to pay yourself a consistent wage each week, fortnight, or month rather than drawing funds at random intervals to support your personal expenses whilst trying to manage business expenses.
Not only will this help to better budget and manage your own personal expenses, but it will also make sure that the business is properly funding your lifestyle and business expenses. If your business revenue is unable to consistently cover all expenses and leave you with profits, then the long term viability of the business may be in question and triaging with consultants would be advisable.
Many business owners suffer for years without paying themselves a personal wage. This can be the source of a lot of undue stress and the temptation to try to run personal expenses through the business.
3. Open Separate Business Accounts
Another critical step is to ensure you have a business bank account and credit card to avoid using your personal credit card or funds to pay for business expenses. This practice is essential for new businesses and smaller companies.
If you mix up the personal and business expenses because they run from one account, the messier your books will become. At financial year end it is much harder to work out what you owe in taxes and what you have made in profits. This could lead to spending more time and money on the bookkeeping in your business.
4. Setup Guidelines For What Can Be Claimed
As a business owner it is vital for your business success to set guidelines between yourself, the bookkeeper, and your accountant to ensure everyone is on the same page in relation to what can and cant be claimed as a business expense. These guidelines should also be inline with the Australian Taxation Office recommendations.
It is important to separate out the personal component of any expenses paid that have a mix of business and personal use. Having clear boundaries and rules in place will stop mismanagement and problems down the track. It is also essential to keep records and receipts to prove all expenses.
Plan Ahead To Help Yourself
This separation between personal and business finances helps you avoid confusion when dealing with taxes. This practice also holds you accountable for the money that belongs to the business and enables you to track exactly how money is being apportioned appropriately.
Being disciplined in your approach to personal and business finances will pay dividends at the end of the financial year and give you peace of mind that your own books and life are in order.