One thing that you should never do with your business’s finances is blend them with your personal finances. Whether you’re an entrepreneur that’s planning a fresh start-up, a new business owner that wants to open up a small store, or a freelancer that wants to be their own boss, this rule applies.
Why is it essential to keep your business’s finances and your personal finances separate from each other? The truth is that there will be financial consequences if you do, both in your professional and personal life. What are those consequences?
One consequence of this money management mistake is that you could disrupt your personal finances. When you rack up your personal credit card with business-related transactions or drain your savings account for business purposes, you could make it difficult to cover the costs of monthly essentials or emergency expenses.
It will be tempting to blend your finances to help you handle emergencies. Don’t do it. You can apply for a personal loan online if you require fast funds to cover an emergency expense. A personal loan is an effective solution for resolving these types of expenses quickly. On the business side, you can apply for business credit that can help in emergencies and provide cash for larger expenses.
These personal loans should not be used for everyday expenses — whether they’re for your personal life or your business. They’re meant for emergencies only.
If you use your personal credit card or debit card for business purposes, you’ll have to sift through your bank statements to sort the business transactions from the personal transactions. And if you do this often, you are bound to miss some transactions and make record-keeping mistakes.
Improper record-keeping can lead to some big problems. You could underestimate your expenses, overestimate your savings, and when it comes time to file your taxes, you could send in an inaccurate record of your income and expenses. If the IRS notices that your record seems suspicious, they might audit you. This should concern you — the IRS has recently stated that it will increase small business audits by 50% this year.
What else can you do to avoid bad bookkeeping?
Mixing these two financial realms could sabotage both of your credit scores. For instance, if you use your personal credit accounts to cover business transactions, you could increase your credit utilization and lower your consumer credit score.
The situation isn’t good for your business credit score either! If you don’t use a separate business checking account and credit card to make your business transactions, you will be losing out on the opportunity to build up your business credit score and get better funding opportunities from banks and investors.
Don’t suffer the consequences of commingling your personal and professional finances. If you’ve made the mistake of mixing these together, it’s time to change it now. Keep them separate!
