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Keep your business and personal finances separate

Business FinanceIt is normally observed that many small business owners find it tough to keep their business finances and personal finances separate, and this is more so when you are involved in a new business. Many people do not understand the implications of mixing personal finances with business finance, and at the end of the year when they have to file their tax returns they find that it is one big mess.

Every businessperson should understand that it is absolutely essential to keep personal finances and business finances separate – treat your business as a completely different entity. Keeping your business finances distinct from your personal finances is a good thing for a number of reasons, the main thing being that it is likely to cause all sorts of confusion. If your business finances are mixed with personal finances, you would not be in a position to tell how well your business is doing, or how much of your personal finance has gone into the business or vice-versa. So even though you may have started your business with a loan, the sooner you separate your business finances from your family’s, it will be better for both.

Why should you keep your business finances and personal finances separate?

  • Calculation and filing of your personal return and your business return would become a very complicated thing for you and your auditor.
  • Having a separate business account entitles you to take all possible advantages and deductions offered by the government.
  • Should you require a loan, it would become difficult, if not impossible, for a bank to sanction a loan if your business account is not separate. You will not be able to show your independent income if it is clubbed with business income.
  • If you do not have a distinct business income, you would not be in a position to write off certain business expenses that could be written off.

What should you do to keep your business finances and personal finances separate?

  • The first thing that you ought to do is maintain segregated accounts for your business and for yourself. Not only is having two accounts tax-smart, it will also improve the functioning of your organization.
  • At the end of the year, all your income and expenses will be in one place, making record-keeping and tax filing easier. If you try to separate all your records at the end of the financial year, you would not be able to remember and recollect all the transactions of the tax year. Ensure that you keep proper records for the entire year.
  • Maintain a separate and exclusive filing system for the office.
  • Maintain your books of accounts perfectly – either manually or through a computerized accounts system.
  • As a business owner, it’s important to know your books and invest some time understanding your financial statements. Scrutinizing cash flow will lead to improvements in your business and financial operations.
  • Do not use business funds for your personal use, and should you do, let it be accounted for, to enable it to be classified later as drawings or a loan.
  • Do not use loan amounts for your personal use.
  • Follow the above steps of separating your business and personal accounts and you will discover that it is a big relief indeed.
Entrepreneurial Learning

Every businessperson should understand that it is absolutely essential to keep personal finances and business finances separate – treat your business as a completely different entity. Keeping your business finances distinct from your personal finances is a good thing for a number of reasons, the main thing being that it is likely to cause all sorts of confusion.

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