Treat Your Business Finances Like a Business

When you have a new business, it is easy to treat the bank accounts like your personal checkbook. Particularly if you have a single owner LLC or sole proprietorship, it might make sense for you to go into your company’s finances for your own personal use, but it is not a good idea to mix your money with your company.

 

Tracking

It is incredibly important for you to track your business finances separate from your own. Even if you operate as a sole proprietor, you need to have separate bank accounts for your business.

To track your finances, you should get a solid accounting package. There are traditional software options like QuickBooks and online options, which are newer, like Wave Accounting.  If you really want to move to online accounting, you can check out all the cloud-based accounting programs offered.

 

Tax Treatment

If you mix your business income with your personal income, you can’t track the taxes correctly. Your tracking will help you itemize your income and expenses. Your income will be taxed and you can deduct your expenses.

For my businesses, I track every single dollar in and out in Quickbooks. It makes tax time much easier. Quickbooks categorizes my income and expenses into categories for the Schedule C, which you can see can be difficult to fill out.

Knowing quickly which expenses are related to my business allows for the maximum tax deduction possible. When you file as a sole proprietor or single member LLC, you can deduct those expenses 100% at your top tax bracket rate. If you are in the 25% bracket, you save $25 per every $100 in business expenses. That adds up quick.

 

Liquidity

Liquidity is important in business, and you should optimize your accounts to cover your costs. I have separate bank accounts for each business, and I keep a high enough balance in them to cover any potential expenses over the next three months.

When I worked in the bank, I had small business customers regularly overdraft because they kept their balances too low. There shouldn’t be a huge rush to pull cash from your business to pay for your personal expenses. Build your business and personal expenses to allow for your business to pay you regularly as an employee, even if you get an occasional bonus.

 

Professionalism

Like with all other parts of your business, treat your business finances professionally. You can ask your accountant for guidance on how to structure your accounts if you are not sure how to start.

For me, using my business bank accounts as a single point of entry and exit for all business expenses allows me to get a better handle on my cash flow and plan for the future.

You don’t want to have bounced checks, you don’t want to have a liquidity crunch, and you don’t want to have to put in any additional money from your personal accounts if you don’t have to. Even if you are a sole proprietor, treat your business like a Fortune 500 company and you should be able to avoid most problems.

About Eric Rosenberg

Eric is a finance blogger at Narrow Bridge Finance and a serial entrepreneur. He runs a media company, flash mob company, and DJ business from his hometown in Denver, Colorado. You can read more about his finance background and connect with him around the web.

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