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Why You Need to Separate Your Personal Expenses from Your Business Expenses

Anyone who has ever started a business understands how important it is to mingle with other business owners. Creating a strong business network is critical to your success. Mingling your personal expenses and business expenses, on the other hand, is a recipe for trouble.

 

If you own a small business as a sole proprietorship, there is no law that says you have to keep your business expenses separate from your personal expenses. But the separation of personal and business expenses is a best practice that successful business owners live by. Here are the 4 most important reasons you need to keep your personal and business accounts separate.

 

It optimizes your tax return and avoids non-compliance

There is a cardinal rule to filing business tax returns: you cannot claim personal expenses as business expenses. If you do, you’ll land yourself in hot water with the Canada Revenue Agency (CRA) or Internal Revenue Service (IRS).

 

Using one account for business and personal expenses blurs the line between personal expenditures and tax-deductible business expenditures. If you use one account for everything, you’ll spend hours combing through transactions to separate the two. You’re at a much higher risk of committing some serious reporting mistakes.

 

Accidentally claiming a personal expense as a business expense could get you audited. If you do get audited, a separate business makes the entire process quicker, easier, and less stressful by keeping things clear and transparent. On the flip side, if you mistake a business expense for a personal one you’ll lose out on tax benefits and deductions. You’re leaving free money on the table you could have used to grow your business.

 

It legitimizes your business

There’s more to establishing a credible business than logos and brand colors. Looks are only skin deep; you need to operate in a way that shows customers and clients that they can trust you. A distinct and separate business account demonstrates that you’re running a legitimate business and not a hobby or under-the-table operation. There’s nothing more unprofessional than asking a customer for an eTransfer to the personal email you use for your personal account or asking them to write a cheque in your name.

 

Using a bonafide business account from which you pay vendors and receive payments from customers legitimizes your business and tells people you are a serious business owner. Operating above-board will attract more business because it lets people know they can trust you. Get paid in a more professional way using a tool like Plooto, a cloud-based accounts payable and accounts receivable solution, using available receivable options like recurring payment, secure EFT/ACH payments, or e-transfer.

 

It saves you time and money

Every business owner knows that time is money, and there are never enough hours in a day. If you use one account for business and personal transactions you’re wasting a lot of precious hours, which costs you money.

 

If you do your own accounting, you’ll spend hours combing through every line of your transaction history. That’s time you could have spent billing clients, making sales, and marketing yourself at those lucrative networking events.

 

If you pay a professional accountant, it slows them down too. The longer it takes your accountant to sift through your transactions and receipts, the more billable hours you’ll get charged. Every minute you save yourself in administrative tasks as a minute you can invest in the growth of your business, plain and simple. Time is money and as a small business owner, you need an efficient financial process like Plooto to manage payments faster.

 

It misrepresents your business performance

One of the reasons that you started your business was to make a profit. Unless you’re operating a charity, you’re in this game to make money. If you use the same account for personal and business activities then you’re not getting a clear picture of how well your business is doing.

 

If you have a separate business account then you can easily monitor your cash flow from day to day. That will help you keep an accurate record of profits and losses. Your business performance will dictate your decision-making process. If you don’t have correct up-to-date information, you can’t make informed decisions or take appropriate action.

 

If you don’t separate your personal expenses from your business expenses, you may be denied the funding you need to take your business to the next level. Donors, investors, and lenders need to see clear, correct financial records that accurately reflect your business performance before they’ll give you any money.

 

The best ways to keep business and personal expenses separate

Now that you understand the importance of separating your business expenses from your personal ones, here are 5 easy ways to do that:

  1. Open a separate business account

  2. Automate payments and receivables with Plooto

  3. Use bookkeeping software like QuickBooks

  4. Hire a professional accountant if necessary

  5. Keep all your receipts in a safe place

  6. Get separate debit and credit cards just for your business

Conclusion

It might seem easier to use one account for everything in the short run but you’re actually costing yourself money and exposing yourself to unnecessary risk in the long run. Few people like crunching numbers, but in the world of business ownership, it’s par for the course. Your professional image depends on how you conduct your business. Keeping your business operations above board shows people you know what you’re doing so you can earn their trust. Separating your business expenses from your personal expenses is the best way to set yourself up for success. You’ll save yourself time, money, and sanity.

 

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About the Author:

Heidi Unrau works for Hardbacon and over the past 10 years, she's worked her way up from an entry-level bank teller to a Credit Analyst, Loans Officer, and now a Finance Writer.

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