A small business owner needs a few dollars for personal expenses, and decides to take the money she needs from her business cash register. No harm done, right? After all, she’s the owner, she works hard to operate her business, and it is her business so it is also her money……right? WRONG. No matter what the amount, mixing any personal expenses with business expenses can end up in disaster.
First, let’s discuss how it affects your accounting. Since money is being used interchangeably between personal and business uses, it makes it difficult for an accountant to determine business expenses. Thus, an accountant may increase their fee, or spend more time than necessary preparing documents. Either way, mixing business and personal expenses can increase your accounting bill – and your chances of being audited.
Having a confused, and probably aggravated, accountant is also terrible during tax season. As mentioned earlier, mixing personal and business expenses makes it very difficult for your accountant to get your documents prepared correctly. Therefore, your business could be missing out on some tax breaks that your accountant could have easily found had she not been so focused on separating your expenses.
Now let’s switch gears and focus on business growth. Yes, mixing personal and business finances can impact your business’s growth. Part of the benefits of owning your own business is that your business can also build its own line of credit. Therefore, as your business’s credit increases, so too do your opportunities to expand or invest more into your business. However, mixing your personal and business finances makes it difficult for your business to stand alone and build its own line of credit. When this happens, lending institutions can (and will) continue to use your personal credit when you need more funding for your business.
Think that your business type (LLC, for example) is keeping your personal assets safe in case of a lawsuit? Unfortunately, think again. Mixing your personal and business expenses causes a “grey area” to form, linking your two account types. All a lawyer has to do is prove that your two accounts (personal and business) are not truly separated, and your personal assets can then be taken to cover your business’s mistakes.
Finally, mixing personal and business expenses lowers a business owner’s level of professionalism. When you interact with a professional who realizes you are mixing your accounts, the professional tends to stop seeing you as a strong business owner. Instead, she begins to view you as a hobbyist. Therefore, the level of professionalism you and your business receive declines.
Below are some tips to help you keep business expenses separate from personal expenses.
1) Keep receipts organized
Carry a binder, folder, or book with you at all times where you can place business receipts. Write an explanation on the back of the receipt about the item(s) purchased to reduce any confusion later about the purchase (and to help if you are audited).
2) Maintain two checking accounts
Always keep a separate business checking account. Never write a check for personal expenses using the business checking account, and carry both check books with you if need be. Having these accounts separated will also make it difficult for any lawyer to determine your assets are blended – which opens your personal assets up if your business is sued.
3) Maintain two credit card accounts
Maintaining two separate credit card accounts will help you keep your assets separated. Again, never mix the two. The less you have to worry about later (personal vs. business expenses) the better.
Avoid using cash for business expenses. Cash transactions can get confused with personal expenses and can be questioned during audits. We understand there are times when you may need to carry business cash. When this is the case, keep the business cash separated from other cash in an envelope or separate pocket. Also, if any of your business cash is running low, do not replenish the cash with your personal cash. Go to the bank immediately and withdraw from your business account. Finally, never leave notes explaining how much money you put into the business cash from your personal cash. Notes can get lost, and cause more confusion. However, if you keep your personal and business cash separated, you will not have to worry about leaving yourself any notes.
It is ok to purchase something for yourself when you are at the store for a business expense. However, keep the personal and business transactions separate by ringing up another ticket. Auditors do not like to see receipts with items crossed out and will most likely question these items.
Always keep in mind that taking a little extra time now to separate business and personal expenses will save you more time and hassles in the future.