Small business accounting and bookkeeping intelligence can help increase your chances at small business success–in today’s blog, we’re wrapping up our series about the six good habits that are vital to successful small business management. We’ve talked about reconciling accounts, paying bills on time, staying on top of receivables, keeping up with payroll and sales taxes and mastering your mail. Today, we’re tackling possibly the most challenging of the six habits: keeping your business expenses separate from your personal ones.
It’s more difficult than it sounds—especially for the proprietor of a company. After all, your small business is your life, and vice versa. However, with a little dedication and a few relatively simple small business accounting tricks, it’s possible and can help you avoid some major headaches.
One reason entrepreneurs like you might choose to run personal expenses through their business: reducing their tax liability. I’ve got three letters for you: I-R-S. If an auditor comes knocking on your door, an inordinate number of personal expenses attached to your business account can cost you. Also, keep in mind (and make sure employees know) that the IRS requires an invoice or receipt for any expense you deduct more than $25. You’re probably not going to be in huge trouble if it turns out you’ve just run a few dinners or Uber rides through your company tab, so don’t fret too much. However, if the taxman discovers you’ve claimed thousands of dollars of personal stuff as business expenditures, then it’s time to worry—you’re looking down the barrel of expensive penalties, or even jail time.
Aside from the pricey IRS implications, mixing business and personal expenses in small business accounting can muddy the waters and make it hard to determine whether your business is actually profitable or not. It’s difficult to plan for the immediate future and long term when you’re not sure how you’re doing. What’s more, if you’re looking to raise venture capital or sell your business down the road, you’re going to need to demonstrate to potential investors or buyers what it actually costs to run the business, if you’re turning a solid profit or not, and if you’re operating a lean outfit. Imagine how it’d look to the people you’re trying to get money out of if you, say, spent $3,000 at Starbucks on the company dime last year, or if you bought all your groceries with your business credit card. If you’re paying yourself a salary or making monthly draws, it’s a good idea to take that money out in modest, regular increments, as partner draws or owner distributions.
The list of solutions to the problem of mixed-up accounts is relatively straight-forward. Make sure you have separate, dedicated checking and credit-card accounts—even if you’re a one-person outfit making all the purchases and paying all the bills. Then, try and keep the checkbooks and cards in separate places—different locked drawers of your desk, or different sections of your wallet, for example—to cut the chance of mixups. If you need any more advice or tips on keeping the divide in place, feel free to reach out to me at firstname.lastname@example.org and I’ll be happy to talk you through it, and tell you more about our professional small business bookkeeping services.