Keeping your business and your personal finances separate can be difficult at times, but it’s an important part of financial management.
When you’re first getting your business off the ground it’s not uncommon to mix your personal and business finances, if only for a little while.
Many business owners will be waiting on approval for a business credit card, or for a business loan approval, in the early stages of their business. And some may not be across the best accounting software for their business just yet.
However, it’s crucial that you separate your personal and business finances for many reasons; including for your professional image and for tax purposes.
Here is how you can start your business on the right financial foot, or make some simple changes for your business today, to disconnect your business finances from your personal ones.
1. Establish your business
Whether you’re getting your business off the ground or transitioning from a cash in hand side work to a full-time business, the first step you’ll want to take is to register for an Australian business number (ABN).
Your ABN will officially establish and identify your business. According to business.gov.au, you will be able to use this for your invoicing and ordering, to claim GST credits, avoid pay as you go (PAYG) tax on payments, claim energy grants credits and get an Australian domain name.
While not every business needs an ABN, it is a simple first step business owners should make to separate their personal finances from their business finances.
2. Open separate accounts
It may seem simple but it’s absolutely critical that you can distinguish between your personal and business financial accounts.
Most Australian financial institutions provide business accounts, including transaction accounts, savings accounts and credit cards. Choosing the provider and applying for a business account will be up to your personal preferences, but come tax time, you’ll be thankful that you did.
Having clearly defined expenses and income outlined in your bank statements and credit card statements separate to your personal financial habits is invaluable for the accounts side of your business. It will also help your professional image to provide invoice payment details to your clients and suppliers under your business name and ABN, as opposed to your personal details.
3. Pay yourself a salary
Another way to help separate your personal finances from your business finances is to use your business accounts to pay yourself a salary, as you would normally receive if you were working for someone else's business.
This will mentally help you to see the separation between your business and personal finances. On top of this, it will prevent further cash flow issues and financial difficulties that may arise from continuing to dip into your business account for personal expenses.
4. Separate receipts
Whether you’re stuffing your receipts into a shoe box or using more advanced tracking methods (hopefully), keeping separate business receipts can help business owners seamlessly make this transition.
Further, by separating business and personal receipts, you’ll be better equipped come tax time when claiming deductions.
5. Use accounting software
Let’s be realistic – not everyone was born great with numbers. If you find yourself struggling to track expenses and receipts, log paid or unpaid invoices and stay on top of your utilities, it may be worth using accounting software.
Accounting software will be linked to your business accounts, so you can easily transition away from using your personal finances to pay business expenses or invoices. Using accounting systems is also vital for business upscaling.
There are a range of cloud-based accounting software available for Australian business owners, including:
Further, at some point in your business you may find yourself struggling to get invoices paid. You may need the assistance of a third party, and if your business expenses are tied to your personal ones, this will be much more difficult.
And a good invoice financing company will be compatible with some of the accounting software mentioned above. This will mean a more streamlined and effective invoice financing service, as your overdue invoices will be automatically updated with your accounting software.
6. Buy separate electronics, if possible
If you’re in a financially secure space to do this, buying separate electronics for your business and personal life may also help you in this transition.
If you’ve previously been using a personal laptop or phone you’ve had for years for your business, consider buying a separate work laptop or phone with your business accounts. Not only may this help with tax deductions, but you can more easily track your expenses.
For example, If you struggle calculating how much of your phone bill should be deducted for work expenses, buying a separate work phone will help you easily identify 100% of the bill as an expense.
Separating your business finances from your personal finances will lead to more efficient accounting, an easier tax time and help you to appear more professional.
For a business owner, opening your first business account or taking out a business credit card may feel like you’re giving yourself more work. But it can also feel like the first step in taking your business seriously and allowing clients to do the same.
If you think that your business can benefit from Earlypay's modern debtor finance facility and would like to find out more, please contact our team today on 1300 760 205 or email us at [email protected]
If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].