Why is it not a good idea to mix your business and personal funds?
For small company owners, using a personal bank account to conduct business or using a business bank account for personal finances does not appear to be a big issue.
Similarly to the HMRC and from good business practices, a lack of separation screams “hobby.” The HMRC can disallow hobby-related deductions and losses.
Keep your work, and personal finances separate if you want the HMRC to see your business as legitimate rather than a hobby.
The disadvantages of mixing your personal and business funds are as follows:
1. Managing cash flow becomes more difficult
Some business owners see money in their bank account and believe they can spend it. This can disturb their cash flow management system. When a major business expense is due, the company may not have adequate cash on hand.
It makes any cashflows planning and forecasting virtually impossible. Using company money for personal purposes can attract tax charges.
2. Exaggerates or minimises tax deductions
Expenses must be wholly and exclusively incurred for business reasons to qualify for a tax deduction. It’s more challenging to track company spending when paying personal payments with a corporate bank account. As a result, you could miss out on valid deductions.
When business owners fail to maintain their financial documents up to date, the situation becomes even worse. Too many business owners wait until tax season to classify their costs and lose the chance to claim valid expenses deductions.
3. Complicates accounting needlessly
When you mix business and personal finances, it’s more difficult to keep accurate financial records.
Separating personal and business costs requires more time.
Your accountant must go through all of the expenses and re-categorise them. It’s a time-consuming manual process that reduces corporate productivity.
Moreover, if you forget to categorise your personal and business spending right away, you may forget about them since human memory fades over time.
4. Causes other stakeholders to raise complaints
Shareholders, investors, and business partners don’t want you to treat the company like a bank account from which you can withdraw money any time you wish to for any purpose.
Stakeholders might sue you for misuse of funds, fraud, or breach of fiduciary responsibility even if you or your company has no intentions for an initial public offering.
If you have other investors and owners in your company, then taking money from the business account for personal spending can cause a significant problem for you.
5. It makes earnings and growth more difficult
The more financially disciplined a company is, the more likely it will succeed. If you’re sloppy with your bank accounts, your company may suffer from a lack of fiscal discipline in other areas. As a result, you would face unneeded stumbling blocks.
Combining personal and corporate money and failing to maintain financial discipline makes it more challenging to manage the company toward profitability and success.
How to keep your business and business accounts separate?
The following methods can help to separate your corporate and personal funds. All of these can assist you in establishing a more significant separation, making it easier to handle the money entering and exiting your firm.
1. Form a company
Sole traders that need a little additional motivation to separate their personal and business money may consider getting their business registered as a company.
This is because, as a sole trader, the line between you and your business is blurry. On the other hand, companies are legal entities, which helps you classify which assets and liabilities are yours to use and which are not.
2. Open a business bank account
Companies must keep their personal and company money separate by law, but single traders can nevertheless open (and profit from) a business bank account.
One of the primary advantages is that it works as a visible split, protecting the company’s cash and making it much simpler to manage expenditure, make tax returns, claim back VAT, among other things.
3. Create a budget for your business
It’s easy to overspend without a clear understanding of your business’s financial boundaries.
Therefore, every owner should have a monthly, weekly, and even daily budget.
The more specific it is, the more likely you will keep to it and reduce the danger of spending business funds for personal use.
4. Think twice about working from home
Working from home may be beneficial in a variety of ways. However, when the border between personal and professional finances is blurred, it can be challenging to manage any division of cash.
Everything is affected if your home-working habits deteriorate, from productivity to your management style to your budget.
There are a few simple things you can do to enhance the way you operate from home and respect your personal and business finances:
- Establish schedules and regular routines.
- Learn to define your professional and personal environment.
- Establish a professional atmosphere.
5. Seek out a helpful hand
If you don’t have time or the skills to complete all of the procedures above, some experts can help you.
To ensure that you don’t end up using your business account for personal uses, you can take the help of business accountants who can help you separate your money or and help you create a budget for your business.
