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Why Mixing Business and Personal Finances is a Bad Idea?

Are you paying your tailor with your business money and spending your personal money to get office supplies? Danger Alert! This mixing of business and personal finances would end you up in devastating chaos. 

Commingling business and personal funds is a common practice among solopreneurs. Well, it apparently seems practical to manage all your finances as one since they’re yours anyway. It’s easy, saves time and lets you focus on growth and operations. Turns out this practice leads to a confused, mismanaged, and complicated state of finances. 

The Repercussions of Commingling Business and Personal Finances

Not keeping your finances separate, exposes you to a great many unforeseen risks. Let’s discuss why this simpler approach is considered such a bad business practice. 

  • No clear picture of financial health

Billing personal expenses to business account can lead to incorrect assumtions about financial health of your business. If you’re using your personal money to pay for day-to-day office requirements, it would cause an underestimate of office expenses when you make a budget. Similarly, using your business money on your doctor’s appointments and nights out with friends would overestimate your burn rate. Having an accurate picture of your financial health and spending patterns is important for every financial decision you take for your business. 

  • Reviewing Expenses

Making cash flow reports and profit loss reports would be a trouble if you have been mixing your finances all year long. Re-tracking every expense, separating one from the other is literally impossible. Commingling business and personal expenses that seemed simpler and faster initially now put you in an endless rut of going back to every purchase and transaction. 

  • Unorganized Data

These intermingled expenses put your business in an unpleasant mess of unorganized data that makes it even harder to generate business expenditure reports on time. 

  • Hard to Track and Share Information

A small business needs to report its business metrics to investors and lenders. In order to have transparency in your business finances, you must have a clean record of every transaction and share it instantly when asked. 

  • Taxes

Certain business entities are required to file entirely distinct business tax returns. When it’s finally time to calculate the income and costs for the year, the last thing you want to do is spend time separating business and personal expenditure. When it comes time to prepare your tax file (or share everything with an accountant), a detailed collection of company-only expenditures is going to save you a significant amount of hassle and time.

  • Accountancy Issues 

If you have been running your company without dedicated financial setups, you most certainly don’t have an account or accountancy software. If in fact you do, and your accountant has to dig through your personal records to identify business purchases from a year ago, it’s unfair. It would be a huge task for your accountants to deal with separating expenses, especially during tax season. Such chaotic last-minute situations are the recipe for blunders, and the slightest of errors here could impact your business greatly.

Unprofessional Business Behavior

  • Customer Mistrust

The official bank account of your business under you own name would make customers dubious of your company altogether. The proper way is to have the official business account to the company’s name to smoothen the digital payment processes.  

  • Red flag for Potential Business Investor

As your bootstrapped businesses progress, you would require investors for growth. Investors look for professional discipline, practices like comingling finances turn away potential investors. Most lenders and venture capitalists require a complete analysis of your business trajectory, cash flow, revenue and more. Inability to generate transparent instant reports limits your chances of growth. 

  • Legal Implications

Businesses face lawsuits all the time. If your finances are merged, not only do you give opponents a strong case with unclear finances but jeopardize your personal life as well. Your personal assets come at stake if you’ve not seperated your expenses properly. Thus every downfall your business faces has a direct and damaging impact on your personal life. 

  • No Culture of Professional Separation

When you haven’t separated your finances, you certainly haven’t set your personal and professional life boundaries either. Keeping a separate account of your business finances portrays a culture of professional separation. Not only does this keep your business finances sorted but lets you maintain a healthy work-life balance. 

How to Separate Your Personal and Business Finances?

Ideally, you should’ve set a separate setup for all your business finances the day you started the business. Considering you have been running your business with finances all messed up with personal money, We’re here to help! These are a few steps to take right away to set your records clear. 

  • Form a separate Legal Entity

Registering your company as an independent legal entity is significant to protecting your personal assets. Your personal assets should not be at risk for your business’s debts, losses and lawsuits. Metric, the accountancy app, provides business insights like these to help you make educated decisions in your business from early on.

  • Make a Separate Bank Account

 Running a company without a business account is a terrible idea. Research and pick a bank that suits your business requirements. Analyze their account categories, fees, interest rates and other statistics before opening a bank account. 

  • Monitor your finances with an accounting software

You fell into the trap of merged finances in the first place because you were doing it yourself and you wanted ease and simplicity. You’re a founder, not an accountant. It’s not officially your job to manage the finances while you keep the company running. If you don’t want to hire a full-time accountant, give accounting software a chance. 

Metric offers all accounting services for free in our customized app. You can manage your cash flows. Automatically generate reports, receive business insights and stay on top of your business at all times. Metric additionally offers upgrading to other plans that too at reasonable costs. These plans offer exclusive services like accounting reports, audit-ready accounts management and dedicated accountant support to name a few. 

  • Regular Checkups 

Having an independent financial setup for your business makes ti step extremely easy. With an accounting app like Metric, you can open the app and view your real-time financial information on your dashboard, as simple as that. Metric would keep your information up-to-date and instantly accessible. 

  • Work with a bookkeeper

Having a bookkeeper app that asks you to enter your inflows and outflows every day would help you maintain this change in action. Metric offers a bookkeeping facility which would keep your spending in check. 

  • Set a budget

Now that you have fixed all your shortcomings regarding finance mingling, it’s important to set a budget and go by it. This way you could realistically track and update your actual spending on different operations, management and marketing now that your business finances are separately documented. 

  • Pay Yourself

When sending out payrolls, set a monthly payment for yourself. This is your work and if you wish to keep your professional and personal finances separately, you need a monthly pay coming to your personal account to get things going in your personal life. This would also let you be vigilant of your monthly expenses and analysis becomes easier.

  • Record Personal Investments or Withdrawal

With all the categorizing finances talks, it’s irrational to believe in a completely independent setup. Since it is your company when you need to add an instant fund you will use your personal money. On the other hand, if you come across a personal emergency, you’re bound to make a transaction from your business account. When these situations are inevitable, it’s practical to keep a record of such incidents. Every time you invest in your company or make a withdrawal, document it. 

  • A digital tool to Manage Receipts

In business, it is important to save all your receipts particularly if you are running on investor money. While it might get hectic keeping every single receipt for future requirements, you can use Metric’s app to upload your receipts that would be saved for future reports. 

Metric has a way to help with all these steps and put you on the right financial behavior. Visit our website to know more about the company, our work and affiliated companies.