Personal vs. Business income
If you’re starting a business you will have gone through the process of identifying the product or service you’re going to sell, the market opportunity and skills needed, and determined the likely profitability of your business. Once done you’ll then need to start treating your personal and business finances as separate entities. This means being clear on differentiating the income you earn as a business and your own personal finances. A simple way to separate your personal entity with that of your business is to split your finances. This means having a bank account for each.
All income received from the business needs to be placed into the business transaction account. And, it's from this account that all the expenses of the business should be paid. If you’re paying yourself a wage, ensure that it’s deposited into your personal account. All of your personal expenses should be paid from your personal account. By clearly separating your finances from that of your business you’ll have a very clear idea of what is yours and what belongs to the business.
This is a very important practice to get into, not only from the aspect of planning and managing finances, but because business owners are often seen as a source of money and frequently asked to help family or friends. Lack of cash flow is a major problem for all small businesses. By frequently withdrawing funds from your business for personal use, you will inadvertently undermine the success of your business. By separating your personal income, you can continue to fulfil your personal obligations and responsibilities based on what you have available in your personal account.
An important reason to separate finances is that it will help you to evaluate the financial performance of your business. Because the finances are clearly differentiated you will be able to better judge the success of your business and plan for it ongoing. The idea of separating your accounts may seem time consuming and even confusing but you will benefit in the long run. Generally business expenses may be partially or wholly tax deductible, while personal expenses are not. By separating your business and personal incomes and expenses, the task of completing your tax return becomes easier.
If you’d like help with separating your personal and business finances, speak with your local banker.