When you start a business, you find that the lines between personal and business expenses blur. Even more so if you own a small or medium scale enterprise without a detailed, functional and adequately staffed organisational structure. You know, those businesses where the owner does everything and manages all business accounts.
One might wonder why it is necessary, or if it is even possible, for small businesses to keep separate accounts from their owner. If you own the business, why shouldn’t you use your personal funds to supplement business expenses and vice versa? After all, you are your business, right? Wrong!
Once a business is incorporated, it becomes a separate legal and financial entity. And even if your business is not incorporated, you are equally encouraged to treat your business as a separate financially entity. But the reasons for having different accounts is not solely about what regulatory bodies dictate. If you’re like most business owners, you intend to have a successful business that grows and makes profit. For this to happen, you should track what your company makes and spends, detached from it’s founder.
It’s okay if your initial business capital comes from your personal expense. Take us for example, when Start Smart began operations, the initial costs for developing our bookkeeping tool and training materials, and rolling out our marketing campaign came from our founder’s personal savings. But this should not continue indefinitely. As an entrepreneur, you should determine your cut-off date when you wean your business off the founder’s personal purse. The benefits of doing so far outway any comfort you can think of, and means your business is one step closer to self sustainability and growth.
Here are a few benefits of keeping your business account separate from your personal account:
Gain the trust of your customers: Imagine that every time you had to pay for a product of service, say a computer from Shoprite or your internet subscription, you were told to make payments to a Mr. Kodjo. How comfortable will you feel with that transaction? There are few things that seem shadier than making payment into someone’s personal account for a company service.
Because businesses go through a stricter process to create their accounts, customers the world over feel safer and more secure paying into a company account.
Track business growth: How do you know if your business made a profit, or where you can cut down costs to be more efficient? The best way to figure things like this out is by checking your income and expenses account. But if your business accounts are merged with your personal account, this gets lots harder. Save yourself the future headache and paperwork, have separate accounts from the beginning.
Secure funding from organizations: Say a bank wants to give you a loan, or the government has one of those initiatives to support small businesses, or if you are one of the lucky ones, you score a private investor. Where do you think they’d want to pay your funds to? Such organisations and individuals like to have an accurate assessment of how good or poorly a business is performing and the ability of the business to repay said loan or investment. They also want the assurance that the money they give you doesn’t end up financing the latest Range Rover.
Stay tax compliant: Lastly, and maybe most importantly, you may find the tax man at your door. Most people have a real fear of being charged with tax evasion and being audited by the Tax Revenue agency in their country of residence, this fear is even more inbred in an entrepreneur. It gives your business an unwanted reputation, not to mention that business is for that period suspended and in the unfortunate case that you found guilty, you may receive a prison conviction and be made to pay huge amounts for the tax evasion and legal costs. Yet, most people fall into the tax trap due to carelessness with managing their accounts; deducting non-deductibles and mixing business and personal expenditures.
We all have a level of personal investment in our respective businesses, and it can be difficult to make these decisions objectively once operations are already underway. Still, it is imperative that you set appropriate boundaries between you, the owner, and your businesses from day one.
Do you think your business is a personal expense? Let’s help you sort that out. Contact us for a
consultation. Here’s what some of our clients have to say. Our goal is to empower businesses like
yours by providing them with the tools and knowledge necessary to drive high business performance.
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