For a small business owner, the lines could get blurred between personal and business finance. When starting out, it is easy to put a lot of effort and time into a venture, which means accounting at home might become less of a priority – or worse, disappear altogether.
But instead of letting finances become a jumbled mess, entrepreneurs and business owners should focus on separating work from home – even if work is at home. In order to do this, one may want to pay attention to the following three key financial tips to pull it all together.
1. Open two different accounts
This idea is crucial, according to Entrepreneur magazine. Business owners should open an account for their personal finances and for the company as well. The reason why is because it simplifies accounting. At the end of the year, owners would have to look at one stack of data and attempt to divide all those home expenses from the venture's. This can get confusing – and, worse yet, become a tax liability.
Two different accounts make tracking important spending and income habits easy, and filing won't be so confusing. It could also help catch vital deductions and other savings, as well as prevent a sticky situation come April. Regardless of accounting expertise, small business owners should always consult their tax advisor before making any decisions.
2. Use separate credit cards, software
When it comes time for a small business owner to file his or her taxes, the greatest fear is receiving extra attention from the IRS. Instead of letting that happen, using a different credit card and accounting software other than personal ones can be a great way to demonstrate that the company is legitimate, Entrepreneur magazine explained.
Additionally, a home office could be a deduction. While some people may fear an audit, they have no worries if it is only used for the business. Owners should never be afraid to use any legitimate tax breaks to their advantage. Having another credit card and record-keeping data only for the company can easily prove that a company exists.
3. Create a strong company budget
Every business needs a good financial plan. According to writer Thursday Bram in an article for The American Express OPENforum, a budget can prevent dipping into personal funds to keep a company afloat. While shortfalls are bound to happen, planning for expenses is a good way to avoid running out of money.
Ideally, small business owners will never have to transfer money from their personal account into their company's. Mixing these two isn't a great idea, and understanding that they are separate is a good way to encourage growth.