Why separate business and personal accounts
From day one, business owners should have a separate bank account in which to deposit their income and pay their business expenses as it’s easier, faster and more accurate to claim business expenses.
If you’re serious about being in business, it’s too confusing to pay expenses and bank sales into your personal account, and then try and work out the different transactions at the end of the month. Even if you’re just part-time or wanting to test the market, the cost to open and run a second bank account is minor compared to the time you’ll save.
If you haven’t formed a company, the separate business account can be named something like 'Susan Smith trading as Susan Smith Web Design'. It’s also useful to designate a business-only credit card for any online business purchases.
But there are other reasons apart from the legal requirements to separate personal and business expenses as soon as you can.
1. Easier to check how you are doing
Separating personal and business accounts helps get a clear picture of your finances. Imagine trying to sort through a list of all your personal expenses (and differentiate between the coffees that were work related and those that weren’t). This is not only true for day-to-day transactions, but also when you're with your accountant working out your overall financial position. Drawing a clear line between the two separates your personal money from funds that go toward running your business.
2. Lower accounting or bookkeeping fees
It’s much easier for your financial advisor to see what’s happening and to account at tax time. The less time they spend sorting through all your records, the less they should charge you. You will pay much less than the extra bank fee you may have to pay with one extra account.
3. Tax compliance
Most businesses incur expenses when generating income and often these can be deducted from the income when calculating business income tax.
Having a picture of your business finances will make doing your taxes easier when the time comes to complete your returns. If you don't separate your business and personal spending, you could spend hours going through bank statements trying to identify each business transaction. Not only is this frustrating and not a great use of your time, it means you may also miss valid business expenses hidden in your personal bank statements and this means you could lose out on possible tax deductions.
4. Business credibility
If you transact from your personal account, anyone paying you will enter into the account that has your name as the description. They will know it’s your personal account and if you deal with other businesses, they will know, too. Having a business account from which you make payments, as well as lodge payments into, will help your business appear more professional and established to your suppliers and customers. It’s also an opportunity to get your business name out there, and hopefully as a result build trust and awareness of your brand.
5. Seamless business transactions
If you have a business account you can link other accounts like a business credit card or a payment mobile solution, making for more streamlined transactions.
As your business grows you may find you have to open a business account in order to get finance and further expand. If this is the case, separating your personal and business accounts now will help you to easily provide any lender with full financial records of your business.
6. Other reasons
Consider using online accounting software. These tools can easily integrate with your banking, and automatically send information back to your accounting system. This ultimately saves you time by making monthly reconciliations quick and efficient. You could also open a separate savings account and regularly put deposit money to help with cash flow when your tax liabilities are due, or to build up a cash reserve.
Businesses that leverage their own data are likely to be more successful in their goals and aspirations than those that don't. Create a business budget to help you figure out how much you have to spend, and to help manage your cash flow.