Getting organised when it comes to your finances is an important part of running a successful business. However, many self-employed small business owners fall into the trap of using their personal current account to run the operation, which means that their personal and business expenses become intertwined.
This article will explain how to keep your personal finances separate from your business, by looking at the following areas:
● Why personal and business finances should be kept separate
● Tips for how to keep your personal and business finances apart
Why personal and business finances should remain separate
Unless you are registered as a limited company, you are not legally required to open a separate business account. However, here’s why we highly recommend that you do:
1. Easier cash flow monitoring
To keep a business in good financial health, cash flow management is vital. This becomes more challenging when your personal transactions are mixed in with business funds.
To get a clear picture of what your cash flow really looks like, this would likely involve the painful combination of data entry and spreadsheets. Mixing business and personal expenses can also keep problem areas hidden, preventing you from finding ways to improve your bottom line and grow your business.
2. Save time and money on bookkeeping
When you mix your personal and business expenses, bookkeeping can take longer to manage. Trying to account for and distinguish between different types of spending is a drain on your precious time as a sole trader. If you are paying an accountant by the hour, asking them to differentiate between personal and business transactions will quickly rack up a big bill.
3. Reduces your tax bill
Separating business and personal expenses will help you claim back your allowable business expenses – and effectively pay less tax. This applies to sole traders, self-employed people and limited companies.
Deductible expenses become harder to identify when they are mixed in with personal bills. The situation worsens if you wait until the end of the month – or worse, tax year – to categorise your expenses. You might even mistake personal expenses for business costs, which could result in penalties from HMRC if you are audited.
4. Stay compliant and avoid penalties from HMRC
According to HMRC, sole traders and the self-employed must keep records for five years after the 31 January submission deadline of the tax year. Limited companies are required to keep business expense receipts for six years.
However, printed receipts are easy to lose, especially when they’re mixed up with personal receipts. If your business has lots of expenses then six years’ worth of records is a great deal of paperwork.
The Countingup business account and app enables you to make payments, automatically categorises business expenses, and reminds you to take a picture of your receipts as soon as you’ve bought something. This removes the hassle of organising your receipts and updating spreadsheets.
Tips for how to keep your personal and business finances apart
Here are some of the best ways to separate your finances and keep it that way:
Set up as a limited company
Depending on your business, it may benefit you to run it as a limited company. Unlike a sole trader arrangement, a limited company is a separate entity from its owners. All assets and liabilities are treated separately from the shareholders’ and owners’ finances.
Operating as a limited company may bring tax benefits, and you’ll also have the reassurance of limited liability. This means you won’t be personally responsible for any of the business’s financial losses or debt, and your personal assets cannot be seized to pay them.
Open a bank account and get a card
This is the most important step towards having separate personal and business finances, so if you haven’t already, open a business current account that allows you to have a card.
It will become simple to use your company card for business expenses and protect your personal cash from any unforeseen business expenses. If you’re strict about using this account for business purposes only, then it will be easy to see an accurate picture of your business income and spending.
Pay yourself a salary
Make it a regular thing to pay yourself a salary from your business bank account into your personal one. If you’re currently using one account for both personal and business, this is a step in the right direction towards separating your business money from your personal cash. It also saves you from dipping into either fund accidentally.
Set a budget
Just as you don’t want to take more money out of your business than you can afford, you also don’t want your business to pull more money from you than your personal finances can afford. It’s common for entrepreneurs to use their own cash to bump up the business cash flow, which you may have to do at some point. Setting a budget for your business will reduce the likelihood of having to do that, and it will be easier to keep your personal money separate from that of the company.
You can read more about how to set effective budgets here.
Use helpful tools
Finding tools that help you manage your business finances will save you a lot of time when it comes to accounting admin and bookkeeping. Using an account and app like the one that Countingup provides gives you structured reports and insights about your current financial health and tax estimates and automatic categorisation of your business expenses.
Using an app like this will eliminate a lot of the issues you may have encountered when running your business and personal finances from the same account.
Make financial management simple with Countingup
By setting up a Countingup business current account, you can keep your personal and business expenses separate, and manage all your financial data in one place. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. You can view real-time insights into your business’s finances, including profit and loss statements, and you’ll be able to create and send invoices in seconds.
Save yourself hours of accounting admin so you can focus on growing your small business. Find out more here.
I bring a wealth of expertise in financial management and business operations to this discussion. My extensive experience in advising small business owners and entrepreneurs has given me insights into the intricacies of separating personal and business finances. I have successfully helped individuals navigate the complexities of cash flow management, bookkeeping, and tax optimization.
Now, let's delve into the concepts discussed in the article:
1. Importance of Keeping Personal and Business Finances Separate:
- Cash Flow Monitoring: Efficient cash flow management is crucial for a business's financial health. Separating personal and business transactions ensures a clear and accurate picture of cash flow, preventing potential challenges.
- Time and Cost Efficiency in Bookkeeping: Mixing personal and business expenses can complicate bookkeeping and lead to increased time and costs, especially for sole traders. The article highlights the importance of saving time and money in managing financial records.
2. Benefits of Separating Personal and Business Finances:
- Reduction in Tax Bill: The article emphasizes that separating business and personal expenses facilitates the identification of allowable business expenses, ultimately reducing tax liabilities for sole traders, self-employed individuals, and limited companies.
- Compliance and Penalties: Staying compliant with tax regulations is crucial. Failure to keep accurate records, especially when personal and business expenses are mixed, can lead to penalties from HMRC.
3. Tips for Keeping Finances Apart:
- Limited Company Setup: Operating as a limited company provides a distinct separation between business and personal finances. It offers tax benefits and limited liability, protecting personal assets from business-related losses or debts.
- Business Bank Account: Opening a dedicated business current account with a card is essential for clear financial separation. Using this account strictly for business purposes streamlines tracking business income and spending.
- Salary Payment: Establishing a regular salary payment from the business account to the personal account aids in further segregating personal and business funds.
- Budgeting: Setting a budget for the business ensures that it operates within its means, reducing the need to dip into personal finances. This contributes to maintaining a clear separation between personal and business money.
- Utilizing Helpful Tools: The article recommends using tools like the Countingup business account and app to simplify financial management. These tools automate bookkeeping, provide insights into financial health, and facilitate easy categorization of business expenses.
In conclusion, the key takeaway is the critical importance of keeping personal and business finances separate for efficient financial management, compliance with tax regulations, and overall business success. The article emphasizes practical tips and tools to achieve this separation effectively.
