Updated January 1, 1 . AmFam Team
You may think it’s no big deal to charge a business expense on a personal credit card or use one account for business and personal spending. However, it’s not the wisest move.
Small business accounting regulations can be very complex and costly to fix, says Michael Velazquez (Opens in a new tab), a senior partner at SVHS LLP CPAs (Opens in a new tab) in Glendale, California. Velazquez should know. His firm helps small businesses with such services as bookkeeping, tax preparation, and succession planning.
Keeping your finances separate can help you monitor the fiscal health of your business and even make it easier to secure a business loan. If you need to revamp your small business’s accounting system, Velazquez offers advice on how to begin.
Small business owners are often warned against commingling personal and business finances. Why is this so important?
When you’re in business, there are a number of potential stakeholders including the government, the bank, and equity partners. When there’s less than full clarity about what the business produces and where the economic activity of the business stops, and the personal endeavors of the owner start, that becomes problematic.
Is commingling a common occurrence among small businesses?
Yes. It’s a common issue with entrepreneurs, especially in the development phase. What tends to happen is a business wants to bootstrap certain aspects of their operations—the accounting or finance function. What that ends up producing is sloppy books or less than full clarity.
What’s the real cost of sloppy bookkeeping?
It ends up costing our clients a lot of our time to try and sort that out. That’s one reason why it’s imperative to have clarity. The more clarity you have on your books, the less you’re going to have to pay your CPAs.
The other reason is when there’s going to be a transaction with a bank. Banks have analysts and they like to pick apart the books and tax returns of our clients. And they often send us questions about why this and why that. So, the more readily available those answers, the better.
Furthermore, the better you’re able to bypass having them ask these questions, the better you are in a position to get credit approval at a quicker rate and on better terms. If those books are less than clear and have some kind of commingling involved, it will cost you in terms of financing.
What are some common mistakes that small business owners make when it comes to mixing business and personal accounts and expenses?
The classic one is the use of credit cards. People use the same card for business and personal. The problem arises when they try to write off everything simply because you paid it out of the business account. Suddenly you see $10,000 worth of expenses and only $6,000 were business related. Now, you’ve got a different number than you thought you did.
That should not happen. [The software program] QuickBooks is a potential deterrent to that if set up properly because you can enter the line items of your credit card statement in accordance with their use. What we recommend is having two credit cards, one for business and one for personal.
What steps can small business owners take to keep their finances separate?
Get some professional help. As a CPA, I think that’s the route people should take; however, there are a lot of non-credentialed accounting professionals out there that could also do the job if they are competent and know what they are doing.
Get someone that you can trust to be a virtual CFO. That’s someone where you can pick up the phone and say, “I just bought this piece of equipment, how many years can I depreciate it?” Get someone who understands the tax law and don’t try to wing it and look up everything on your own because pretty soon you’re going to be taking away from moneymaking activities of the business.
What financial tools would you recommend for a small business?
QuickBooks Accounting Software (Opens in a new tab) is a lifesaver for small businesses, but it has to be set up properly. Get someone who can help you set it up according to how you earn your revenues or how you conduct business. You can easily turn QuickBooks into a contact manager, a billing system, or a virtual dashboard that controls your entire business, not just the accounting.
How can mixing finances hurt the business’s bottom line as well as the owner’s personal bottom line?
Because of the lack of clarity, people don’t know how healthy the business is. You may not know how wealthy you are as a business owner.
By separating your business and personal finances, you have a better understanding of your company’s fiscal health over time. With more clarity in your finances, you also are less likely to make a costly mistake such as writing off a personal expense when tax time comes around. “There [are] myriad reasons why you should make an honest effort to separate business from personal,” Velazquez says. “If you’re doing that, chances are, everything’s going to be fine. If you’re not, it will eventually be a problem for you.
Want to learn more savvy business strategies? Take a look at our business resource center. And, one of the smartest business decisions you can make is being proactive about protection. Connect with an agent (Opens in a new tab) today to learn about customized coverage for your business.