It’s not just because of the fact that keeping personal finances out of your business helps you to truly understand your business’s financial health, but it is also required for tax purposes. Proper bookkeeping can help you maintain records allowing you to keep all your personal and business expenses separate at all times. We all know that as you are getting started in business the lines are blurred between the two as many entrepreneurs finance the start-up through personal savings, but it is important to use the following bookkeeping methods and tips to help keep them separate:
1. Set-up a Business Account
The simplest way to keep expenses for the business separate from your personal expenses is to set up a business checking and savings account that will be used only for business expenses and also serve to make business deposits. If and when the entrepreneur has to make a loan to the business from his/or her personal savings, a bookkeeping entry can be made accounting for the incoming money as a loan to the business and not to be confused with taxable income. Having a separate account will not only be a great tool in helping track expenses for bookkeeping purposes, but will also serve as a way to track loans the entrepreneur has made to the business over periods of time. Most banks here in Jacksonville, FL can open an account for you simply by looking up your business entity on www.sunbiz.org and as long as you are listed as an officer of the business, they will allow you to open the account in the business name. If you need help getting an business set-up or need an EIN number for opening a checking account, please email us at firstname.lastname@example.org today and we can help you get set-up and ready today!
2. Set-up a Business Credit Card
A business credit card is a great way to help build business credit as well as keep business expenses separate from personal expenses as long as the card is only used for business purposes. Another significant benefit of a business credit card is the credit limits tend to be a little higher than personal credit limits, the card balance does not take up room on your debit-to-income ration on your personal credit report, and you will have the ability to earn rewards for your business.
3. Separate Files for Receipts
As many of you know, receipts are important to hold on too just in case a tax auditor needs to review them. It is very important that the receipts for business and personal are kept separate so that receipts match up to what are in the business bookkeeping records for tax time. To help maintain separate files, make sure to label the files as either personal or business and keep them in different areas so that they do not get mistakenly mixed up.
4.Put Yourself on Salary
Surprisingly the number one issue that entrepreneurs have causing them to use a business card for personal expenses is that they are not on salary themselves and feel justified by buying something on the business, justifying it by thinking “well I haven’t taken a salary.” However if you take money out of the business, and it is not a distribution or a repayment of a loan you have given the business (which must have proper documentation and bookkeeping) then it has to go through payroll and have payroll taxes taken out. As side from the legal standpoint, which is plenty of reason to put yourself on salary, another great benefit is the entrepreneur will be able to budget his/her personal expenses based on the salary from the business.
Speaking of budgets, having budgets for both personal and business expenses can help tremendously with keeping personal and business expenses separate. If you are like most entrepreneurs, as soon as the business bank account gets low, you start funding the business with personal money or buying business items with personal money. A budget can help tighten spending and allow the business to take care of its own expenses allowing the separation of personal and business. A business budget is extremely important and so is a personal budget, if you need help with either of these we would be happy to help you set up a budget in you bookkeeping system today!
The end of the year is hard enough with getting ready for taxes for your business and personal, don’t make it harder then it needs to be…make sure that you are taking steps now to separate your personal and business expenses as well as using proper bookkeeping on a daily, weekly, and monthly basis!
How is it that businesses make it past the 50% failure rate in the first year, or even more minute is the 5% that succeed after five years? This is a shocking statistic and can be a bit scary when starting a business, but having the proper bookkeeping in place can be a very powerful tool in combating the forces against small businesses. According to the source of these statistics, Small Business Trends, as well as the Small Business Association is to Plan and Budget at all times.
Entrepreneurs (also know as Treps), come into a business full of passion for the product or service that they are providing the general public, they also have a focus on delivering that focus, however research has shown that a significant portion of Treps lack the bookkeeping and accounting skills to properly manage the business. While short term success can be achieved by amazing work ethic of the Trep, it is not sustainable as the shortfall in bookkeeping will catch up with the business as is the case with 50% of businesses in the first year. The nuts and bolts of bookkeeping is balancing the incoming payments from customers for the product or service being sold by the business with the outgoing payments by the business, then leaving the calculated net profit (the revenue minus expenses). This would be considered the absolute most basic level of bookkeeping and what you would find in software packages, do-it-yourself accounting, and a lot of bookkeeping businesses.
The basic level of bookkeeping is not enough though to grow past the 95% failure rate of the first five years of a small business. A small business needs more to be sustainable and profitable. The next step is once the financial reports (that is the profit and loss statement, balance sheet and cash flow sheet) are produced, you have to analyze these reports, meaning dig deeper into the reports and see what each number means about the business health. As an example, look at the materials cost (materials cost is what it actually cost the business for the actual product to be made that the business sells) and see what the percentage it is of overall sales, is there anyway to bring that down and thereby increase your cash flow and profit margin (profit margin is the percentage you make for every dollar you sell of product). Another example is look at the general and administrative cost, there are a lot of cost here that sometimes get set on auto-deduct which you may not even use anymore, you would be surprised how much money can be cut just by looking at these expenses. Planning for the future and budgeting a portion of the current profit for the future is done during the analysis of the reports as well, so that you don't end-up running short during a slow season or needing to take high interest loans during times of growth in the future.
As you can see bookkeeping can help keep your business finances in order, it can help you to make proper business decisions, and it can help you plan for the future. If you go beyond the basic bookkeeping, your business will have a much better chance of breaking through 95% failure rate and lasting many years to come.
As a note, all of our standard bookkeeping packages at CFO Bookkeeping include over-the-phone coaching at the end of every period where we help you look at and analyze your financial reports so that you can increase your cash flow and plan for your future!