Starting a business affects your life in many ways outside of work, in particular the way you manage your personal finances. One of the biggest mistakes new entrepreneurs make is not keeping their personal and business finances separate.
"They move money back and forth and it is very important to keep their records separate," says Edward Wacks, a business financial advisor based in Plantation, Fla. This commingling of finances, Wacks says, can have some damaging implications for your business down the road.
For example, if you are paying business expenses with personal funds or vice versa, it becomes challenging from an accounting standpoint to know what your profits or revenues are for your business, says Wacks. That makes filing your business taxes a headache.
Also, without a clear division in your finances, your personal assets are less protected if your business is sued or you take out a business loan and can't pay it back.
"Many entrepreneurs are great salespeople, but they are not as good with the inside" of a business, the metaphorical financial guts of a company, says Wacks.
Here are three tips for protecting your personal finances as a business owner:
1. Keep separate bank accounts. Taking this one step to separate business from personal will make the biggest difference, especially at tax time when you document your business' profits and losses. While this might seem obvious, Wacks says this is a common mistake he has seen startups make.
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2. Think like you have business partners, even if you don't. To prevent yourself from getting lax about keeping your finances separate, think as though you have business partners, says Wacks. You wouldn't expect your business partners to pay for your groceries or the recent fill-up at the gas station: that will have to come out of your personal piggy bank.
3. Don't mix credit card purchases. When it comes time to pull out the plastic, keep one credit card strictly for business expenses and a separate one for personal purchases. Otherwise, trying to parse the business charges from personal ones on your monthly statement after the fact can get confusing.
What is your best advice for keeping business and personal finances separate? Leave your comment below or respond to other reader comments.