It is hard to keep things sorted when you are multitasking and are bogged down with additional responsibilities and stress. However, the best way to deal with the situation is to keep things sorted. Maintaining a balance is the quintessential requirement for running a business. The key is to keep things organised and streamlined, and this applies to every aspect of business operations.
For instance, if you do not keep your business and personal accounts separate, you will be facing a huge challenge at the time of filing your tax return. It is easier to manage your finances when you have a clear-cut distinction between what’s personal and what’s corporate.
It is a critical lesson to be learnt if you are planning to purchase a business for sale in South Africa as you will be well-prepared to avoid the financial risks associated with the merger of the two. Here is how you can keep your business and personal finances separate but first let us understand why it is crucial.
Significance of Separate Accounts
Besides being a good bookkeeping practice, it is vital to have separate finances for a lot of reasons. The first and foremost one is the legal consequences. When you start a company, trust or partnership, you create a new business entity which is separate from yourself. However, if you have mingled your finances, then you will be paying for any damages incurred by the business in a legal battle from your pocket.
Secondly, your bookkeeper will have to go through your accounts to find all the business transactions at the time of tax submission. It can lead to a lot of wastage of time and effort and increases the chances of errors. Also, when you are looking for funding, the lenders will be evaluating the bottom-line and financial health of your company. If they witness a messed up show, getting the loan can become a distant dream. So make sure you do not commit this mistake at any cost.
How To Keep The Business And Personal Accounts Separate?
1. Establish A Separate Business Entity And Account
The first step is to register a company with the Companies and Intellectual Property Commission (CIPC) in South Africa so that it can be differentiated from your personal transactions. The next step is to open a separate business bank account. It will be a good idea to have these accounts in different banks so that you don’t get confused between the two and avoid the urge to muddle up the transactions.
A professional bookkeeper can come handy in this situation and act on your behalf to keep things managed and systematic without mixing up the expenses. It means that during the tax season, you will be able to easily assess your bank statements and create the required financial reports without any disambiguation.
2. Get A Business Credit/Debit Card
When you have your company’s debit/credit card, you will no longer be using your personal one to purchase business assets and stock. You will also be able to have easy access to your funds and keep track of the reserves and the expenses. It helps in creating a robust credit score history if you make the payments on time.
This credit history will act as your supporting document when you need a small business loan in the future. It will increase your borrowing potential and improve the confidence of lenders.
3. Keep The Receipts Separate
Just like the good old days when you kept hard copies of everything, you can follow the same procedure to keep the personal and business receipts separately. It is important during the time of audits. If you do not have time to manually separate them, create two folders to segregate them as and when they arrive. You should also have separate accounts on online sites from which you make purchases for the business. Your online transactions should also stay unconnected.
4. Pay Yourself And Maintain Cash-Flow
Although you own the company, you need to get paid a salary in your personal account like every other employee. It will give you access to personal funds for your own expenditure and stop you from using the company’s money for your private spending. Make sure that you are not putting money into the business from your funds.
It can blur the lines of demarcation that you have set up for long. In fact, negligence of cash flow management is one of the challenges faced by every small business. So make sure you are being treated as an employee when it comes to payment of salary, and you do not take any advantages of being the owner.
5. Track Expenses Incurred For Business
Business expenditure will include travel costs incurred when you were visiting clients or the use of your mobile phone for making calls to associates or suppliers. All of these personal items should be added to business expenses when they are being utilised for the company.
These costs, as well as a home office, are tax-deductible, but you will have to maintain the call logs, and the vehicle must be company-registered to make a claim. If you take your client out for lunch, its cost will be tax-deductible as well.
6. Keep Your Business Expenses Separate
Similarly, you need to keep your personal spending separate from business spending. If you are running your business from home, this becomes quite essential as you can put the entire electricity bill in the business expenditure column. You will have to pay half of the bill from your personal finance to maintain the balance.
Additionally, if you are lending money to your business from your savings, then you must follow a strict deadline for reimbursement received from your business like any other loan repayment. For this purpose, you must stick to your budget and do not exceed it so that you don’t have to take a loan from your private account.
When you are running a business, you can get carried away and combine your funds. However, it is essential to keep the personal and business finances separate to measure the financial health of your business and file taxes accurately. Thus if you are planning to purchase a business for sale in South Africa or set up a company, you must adhere to the tips mentioned above to steer clear of any problems.