How do I keep my personal and business finances separate?
Getting your personal and business finances mixed up can be all too easy. You need to buy school equipment for home and supplies for the office, and you only have one receipt. So, how do you separate your legitimate business expenses from your personal spending?
It’s not impossible to do, and you can make a start at any time. Here are ten great ways to manage your business and personal expenses.
1. Separate your bank accounts
If you’re a sole trader, it is not a requirement to have a business account. However, this doesn’t mean you shouldn’t open one. The single most effective way to track business expenditure is through opening a business account. Having separate accounts creates a visible boundary in your finances. If you want complete separation, consider opening a new business bank account with a different bank.
2. Use accounting software
Good accounting software allows you to track income and expenses while keeping a close eye on your financial transactions. Accounting software can also save you time by identifying business spending at a glance and generating reports that give you relevant insights into your business finances.
3. Set a budget
Sticking to a budget in your business finances makes it easier to avoid the potential need to use your personal finances (at least in theory). Sometimes it may be unavoidable due to various reasons. The more clearly defined and realistic your budget plan, the easier it will be to stick to your budget.
4. Create boundaries between home and business
It is essential to ensure you have boundaries between your work and personal life. To avoid blurring the two, carry professional work practices, such as expense management, into your home office. Without boundaries between your work and home life, it may be hard to manage your finances.
5. Manage receipts
Businesses may choose different ways to manage their receipts. Receipts stored in hardcopy could lead to them becoming misplaced. Companies today may want to choose to keep receipts online. Online receipt management through different expense management apps and software helps businesses to stay organised.
6. Use business credit cards
Company cards offer a variety of benefits for a small business. Make emergency purchases for your business without any risk of confusing the purchase with a personal one. You’ll be less tempted to make a rash purchase when it’s your business funds.
Remember that conventional business cards have their limitations. Traditional business cards do not incorporate real-time spending updates or limits. An alternative option for your business may be a prepaid business card. Prepaid cards mean that you can micromanage business spending. By topping up cards with an agreed budget and individual limits, you have more control over your business finances. A prepaid business card ensures it is kept separate to your personal bank cards.
7. Be clear on business expenses
It’s easy for personal expenses to mix into business expenses if you’re not clear as to what they are. If you work from home, HMRC has defined amounts to claim for electricity, phone and internet use. Keeping a business log can help you keep track, but you need to be clear as to what is genuinely tax-deductible. Entertainment, travel and food are common areas in which private and business expenses may overlap and require clear categorisation.
8. Be careful with cash
Using cash for business expenses can leave you and your employees out of pocket and have a disruptive effect on your expense management systems. That, in turn, can impact on morale and productivity. Using a prepaid business card allows you to differentiate between legitimate employee expenses and personal expenses effortlessly. You won’t have to worry about loose change, and your employees won’t have to worry about claiming their money back. Using a prepaid card eliminates the lack of clarity that cash can generate – especially when left with loose change! Further to this, your employees won’t have to worry about claiming their money back at the end of the month.
9. Pay yourself a salary
Pay yourself a salary and automatically create a fixed outgoing that’s easy to track. You’ll also build a credible identity as the head of the company. Once again, in establishing that separate profile, you’re creating a distinction between private and business finances.
If you want to take this one step further, consider becoming a limited company or limited liability partnership (LLP). Different entity types have different accounting requirements. An LLP is a relatively new entity type and offers some of the accounting benefits of a standard partnership, combined with the limitation of liability associated with a limited company.
10. Talk to a financial professional
The good news is that you don’t have to implement any of these suggestions alone. Work with a professional adviser who can help you establish a system that works for you. Whether that’s using accounting software or a prepaid business card, a professional can make sure that you scrutinise your expenses with a calm and calculating eye.