You know you’re growing up as an entrepreneur when you realize that it’s time to for your business finances to fly on their own. No more commingling of accounts, no more grey area, no more personal checks for business expenses. There’s business, and there’s personal. And there comes a day when the two have to go their separate ways.
When you’re first starting out, it doesn’t make sense to go overboard with new accounts or a dedicated credit card. Who knows if anyone will buy what you’re selling? You hope they will, and you’re willing to sacrifice your weekly latte to make sure they do. Then you hit paydirt. Calls start coming in, clients multiply, costs increase. Suddenly, you need a website, an accountant, business cards, supplies, even a few ads. Maybe it’s time to separate your business finances from your personal accounts.
Yelena McManaman, social media marketing specialist and founder of 1Click VA http://www.oneclickva.com, knew it was time to make her move when she and her husband were buying an apartment. Her business was already generating steady income, but she hadn’t yet set up a separate business account – all her earnings went into the family account and expenses were charged to her personal credit card. So when the agent asked McManaman to verify her income, she couldn’t. There was no proof of cash flow. Whoops. “That’s when I realized that having a separate business account was not only good for my business, but essential for getting any type of financing deals in the future,” she says.
Clearly, at some point it pays to separate your personal finances from your business finances. But how do you know what to do and when to do it?
You know it’s time when…
- You’re not sure how much money is going in or out. Budgeting is overwhelming. Costs are rising, and you’re losing track of receivables.
- In theory, you “should” be earning more; in practice, you still can’t make ends meet and you never seem to have enough in the bank.
- You wish you could run reports (expenses, income), but you can’t easily access the data.
A few ideas on what to do…
- Incorporate as a limited liability company (LLC). Be sure to speak with a lawyer because every situation is different!
- Set up a separate checking account. Make it your business bank account.
- Get a separate credit card. Concerned about running up more debt? You should be. If you’re really sweating it, get a debit or prepaid card instead. Remember: A credit card is free as long as you pay off the balance every month, and there are plenty of cards out there with no annual membership fees.
- Deposit all income from your business into your business account. Technically ALL profits are your earnings, and you’ll have to pay taxes on the profits. So put yourself on a fixed “draw,” make sure there are operating funds in the account, and budget accordingly.
- Set a goal to hire a bookkeeper with Quickbooks expertise. (Don’t learn it yourself — it will take valuable time away from your business). Request monthly profit-and-loss statements. You need real data to understand which areas of your business are performing well – and which aren’t.
For Kate Lister, founder of Undress4Success.com and author of Undress For Success: The Naked Truth About Making Money at Home, the defining moment came when she was line-item audited by the IRS. Among the issues were credit card membership fees, if the card was used for both business and personal expenses. “In the end, they owed me money,” Lister says. “But it wasn’t enough to pay the $2,500 it cost me to defend my innocence.” Since then, she has started three successful businesses – and become religious about keeping separate accounts.
By separating your accounts, your personal financial choices (good or bad) can’t affect your business – and vice versa. And that’s something to think about. So keep them separate.