This month, we’re focusing on taxes and finances and we’ve updated this post as part of February’s Getting Down to Business series. For a full schedule of events and blog posts, go here.
This guest post is by Amanda Steinberg, founder of DailyWorth.com. DailyWorth is a daily email about money for women — delivering practical tips, empowering ideas and the occasional kick in the pants.
How can you improve your business operations? One simple yet incredibly important financial step you can take is to separate your personal and business bank accounts. No more comingling of accounts, no more gray area, no more personal checks for business expenses.
A few years back, around tax time, I remember it taking me three days’ worth of effort to separate my Quicken report into personal and business expenses. Opening a second bank account is pretty easy and, even better, free. Okay, so you have to buy checks. But the time it will take you to separate data “after the fact” is ugly. Think of it as time that you could be using to sell or make your services or products.
When Your Business is More than Just a Hobby
When you’re first starting out, it makes no sense to go overboard with new accounts or a dedicated credit card. It’s just a hobby, right? Wrong! Sales will start rolling in, and before you know it you’ll have orders to fill and more raw materials to purchase. Suddenly, you need a website, an accountant, business cards and more supplies –- you even buy ad space on a few key websites. Do yourself a favor and open a bank account specifically for your business expenses.
Yelena McManaman, social media marketing specialist and founder of 1Click VA, 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 (cash that’s owed to you that you haven’t collected). You know you “should” be earning more based on sales volume. In practice, you still can’t make ends meet and you never seem to have enough cash in the bank. You wish you could run reports (expenses, income), but you can’t access the data (because it’s all mixed together).
A few ideas on what to do
Set up a second checking account. Use your business name and Employer Identification Number (EIN) on the account — do NOT make it a second personal account. If you don’t have an EIN, you can apply for one online on the IRS website. Make it your business bank account. Get a separate credit card. Concerned about running up debt? Please, be concerned. If you’re sweating a second credit card, get a debit or prepaid card instead. But get a card to manage all expenses like website hosting and PayPal transactions. 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 of your sales income into your business account. Technically, all profits are your earnings and you have to pay taxes on the profits. But that doesn’t mean you should always take all of the profits from your business account. Put yourself on a fixed “draw” to make sure there’s operating money in the account and budget accordingly.
Set a goal to hire a bookkeeper, a bookkeeping service (cheaper than an employee in the beginning), or use a free online bookkeeping tool. 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. You’ll also find you have better control and far more sanity when it comes to your finances.
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