Why you shouldn’t mix business and personal finances.
Working as an accountant for many years really opened my eyes to see the need for educating business owners about finance. What I have seen is small business owners fail to keep personal and business expenses separate. When it comes to the monthly reconciliation of the finances it was a mess! Here are a few things I have seen over the years that I’d love to share so you can keep your finances in order.
SEPARATION – As I mentioned above a lot of small business owners tend to mix personal and business income and expenses. Make sure you have separate bank accounts, debit cards, credit cards, and merchant service accounts like Paypal, Square, etc. If business and personal aren’t kept separate it creates a mess during tax time. It also doesn’t provide a clear picture of how your business is doing.
SALARY – Not paying yourself a market-based wage means the net income of your business is lying to you. As Greg Crabtree says, “Until you pay yourself a market-based wage and plug that number into your financials, your financial data is worthless.” Make sure you are paying yourself a realistic wage so your financials reflect correctly how much your businesses are making.
FOCUS ON GROSS PROFIT – Your gross profit matters most because it shows whether your sales are sufficient to cover your costs.
SPENDING – Make sure you have budgets in place so overspending doesn’t happen. You need to know at all times where money is being spent. I recommend creating a spreadsheet or using accounting software like QuickBooks to track this. When making a large purchase ask yourself if will add value to the business. If it doesn’t consider why you are making the purchase.
Make sure to create a budget and track your expenses. If you have a system in place, congratulations! If you don’t have a general understanding of finance it can create difficulties down the road.