One of the most frequent mistakes that small business owners make is intermingling their business finances with their personal finances. While it may not seem like a big deal to run your start-up company through your personal checkbook, doing so can create real problems for your business and your family.
In this series, we’ve been using looking at how the basics of biblical wisdom that we use in personal finance also help us to run business finances well. Today’s lesson is such a simple one that I almost didn’t include it: In order to be truly diligent in managing your business finances, you must keep them separate from your family finances.
For many people, a small business starts as a hobby, a series of side-jobs or some other relatively minor activity. When you do some freelance work for someone, they may write a check to you, and you deposit it in your bank account. When you’re working on a super-small scale like that, it’s okay to treat this side work as personal income. But the day that you hang a shingle and put yourself into business as a real company, you need to begin separating the company’s finances from your personal finances.
23 Be sure you know the condition of your flocks,
give careful attention to your herds;
24 for riches do not endure forever,
and a crown is not secure for all generations.
25 When the hay is removed and new growth appears
and the grass from the hills is gathered in,
26 the lambs will provide you with clothing,
and the goats with the price of a field.
27 You will have plenty of goats’ milk to feed your family
and to nourish your female servants.
The point of this passage is pretty simple: If you don’t keep careful track of your money and assets — and know exactly what they’re doing — then they’re going to disappear on you. Money is like water: If you don’t channel it properly it will drip out of your hands, leak away or evaporate.
So what does this have to do with keeping your business and personal finances separate? Well, if you’ve got your company’s money and your family’s money lumped into one account, you probably don’t have a very good idea how much belongs to which area of your life. If there are a bunch of business funds sitting there, you may be tempted to spend that money on family luxuries, when it should actually be set aside for business expenses. In a similar way, having your money co-mingled can make you think that your business has more money that it actually does.
One of the dangers of co-mingling these finances is that it obscures your view of how successful your business is. As a small business owner, you should constantly have your finger on the pulse of your company, knowing what works, what has potential and what is profitable. You need to be able to tell if your company is financially healthy, and know how much money the company has to set aside for emergencies or to invest in growth. But if all of your business money is lumped in with your personal money, it becomes very hard to know how the business is really doing. All too often, people can’t diagnose problems with their financially unhealthy businesses because the problems are hidden within their family bank accounts.
Keeping your accounts separate protects your family finances from business mistakes, and helps you to run your business finances from an objective point of view. It’s also a lifesaver when it comes to taxes: Many business expenses are tax deductible, but if you’re paying for things like office supplies or inventory out of your personal checking account, it get’s very tricky to know what was a business expense or a personal buy. Going down this road raises the suspicions of the IRS; if they suspect that you’re not doing a good job at documenting your business financials — or if they think that you’re fudging the numbers — they’re going to put you on the list for auditing. And you don’t want that.
So, here’s the takeaway from today: If you’re a business owner, or in business for yourself, you need to have two of everything. Two checking accounts, two savings accounts, two budgets, etc. One is for your personal finances, and one is for your business. When it’s time to pay yourself a salary or profits from the business, you write a check to yourself from the business account, and then deposit it in your personal account.
This may seem like a lot of work, and it is. But it’s the only way to make sure that both your business and your family are getting a fair financial shake.
Photo by Blue Fountain Media. Used under Creative Commons License.