There’s so much to think about when starting a new business and many entrepreneurs simply put off opening a separate business bank account until later.
If you’re a sole trader, legally you don’t have to separate your personal and business finances, but it’s definitely sensible to do so. Yes, keeping track of multiple accounts may seem like extra work but in the long term keeping your personal and business finances separate will make it a lot easier to manage your money.
Accurate Financial Records
If you use the same bank account for personal and business expenses, you’re guaranteed to find yourself with a headache when tax season rolls around. It can take hours to go back over your accounts and try to remember which transactions were business-related.
It’s also a lot easier to make mistakes, which can come back to bite you later on in the form of a fine or an audit. Separating your personal and business finances renders tax season much more straightforward.
In addition to this, mixing your personal and business finances makes you more likely to create inaccurate cash flow projections or miscalculate your profits. This can then result in overspending or a skewed view of your growth. These mistakes compound over time and your murky records may land you in hot water.
In order to create a successful business, you need to treat it like a business from day one. Keeping your business and personal finances separate goes a long way in helping you to do this. It creates a sense of professionalism and helps you to actually feel like a serious business owner.
Furthermore, clients will take you more seriously when they make payments to your company bank account.
Financing Your Business
Having a separate business account makes it much easier to secure finance for your business. When attempting to obtain business credit, any lender will require evidence that your enterprise is financially healthy and that you manage your money well. If your statements show a confusing combination of business and personal transactions, you’re unlikely to be taken seriously.
Furthermore, mixing your personal and business finances can negatively affect your credit score which may prevent you from obtaining both personal and business credit in the future. It’s much more prudent to separate your finances early on so that you don’t end up in hot water and can maintain a safety net.
Preparing for an Audit
An audit may be the furthest thing from your mind right now, but in the future you may face one and it’s vital that you’re prepared to do so.
When your business undergoes an audit, it’s crucial that you provide accurate, easy-to-follow financial records that demonstrate that you are an honest and law-abiding organisation. If your records are confusing, you’ll have to endure a barrage of admin and office visits in order to set them straight, and you may face a hefty fine.
Protection Against Fraud
Cybercrime soared during the covid-19 pandemic and online fraud is something you should take seriously as a business owner. Of course, having your bank account breached is always bad news but if you use a single account to manage your personal and business finances, you’ll essentially be hit twice.
Separating your personal and business finances offers more of a safety net against cybercrime and may allow you to continue operating even if one of your accounts does fall prey to fraud.
Separating your personal and business finances is an essential step in ensuring the financial health of your business. Not only does maintaining separate accounts render it far easier to keep accurate records, it can also help you to grow your business by securing credit and creating a sense of professionalism that puts you in the right mindset for success. It’s a worthwhile step for any new business owner to take, and when tax season rolls around, you’ll be very glad that you did.