New and Small Business advice:
Why you should keep Business & Personal Expenses Separate
Using the company credit card for personal purchases might seem harmless, but it can cause big problems down the road.
Ask any accountant about the most common financial mistake small business owners make, and they'll all say the same thing: Mixing personal finances with business money, particularly expenses.
We work with a lot of new and small business owners that suffer from not drawing the line between business and personal matters. Each business should have its own bank account and credit card for business use. Owners should have their own personal bank accounts and credit cards for their own personal pleasure.
If you are paying for something, work out there and then whether it is for business or private use (or at least very predominately one or the other). The first thing is, you just saved a lot of time in bookkeeping as you later don't need to work out what it was back when and 'what on earth was that payment for'? You also save time in not having to explain to the accountant or taxman, what all that personal stuff is about.
We recommend this approach for several reasons. First and foremost, if you are incorporated as a Company or even Trust, you're required to keep personal and business finances separate. Violating this rule could breach your corporate protection and put your personal assets (may be home) at risk. There is even a thing called 'fraud against your creditors' should you inappropriately allocate business money to your own purposes in front of the business people you owe money too. Your house could unexpectedly be on the line without you even realising. If you are unclear about this important risk, make sure you ask us at your first opportunity.
Regardless of your corporate entity structure, combining expenses also makes it difficult to gauge the financial health of your business. If the balances aren't separate, you can't identify your business profit, and you don't even know if you're actually making a profit! If that's not enough reason, mixing expenses creates extra work come tax season. You have a nightmare on your hands when tax season rolls around and you try to sift through receipts and sort which Bunnings or Office Works trips were for business and which was personal.
It's easier in the long run to keep everything separate, even if you weren't legally required to do so. While a sole proprietor is not required to maintain a separate business account, it still helps to separate the two different worlds and it is ultimately cheaper. Get in to the habit of carrying both business and personal credit cards with you, or pay business purchases from your business account. It is that easy to save time, money and you won't run into any of these headaches.
If you need advice regarding how to do this for your business, and setting it up properly you should call us now! 9580 9866