Business versus personal finances

GetPrimaryImage__8_.jpegSmall business owners (particularly one-man operations) may not see the need to separate their business and personal finances.

During the early stages of the business, small business owners will typically think nothing of using their personal accounts for business transactions e.g. paying suppliers. By the same token, income generated by the business is sometimes also regarded as personal income, and little or no effort is made to distinguish between personal and business expenses.

Whilst it may seem like an easy and convenient solution to merge one’s personal and business finances, it is not in the best interests of the business in the long term. Small business owners will not have a clear picture of the financial status of the business, lacking even basic information on income and expenses. This in turn negatively impacts on the small business owner’s ability to manage cash flow, and to make strategic decisions around pricing, costs and other key elements of the business’ profit model.

It also makes it difficult for the small business owner to provide interested parties (e.g. the South African Revenue Service, potential funders) with accurate information on the business’ finances.

Access to the personal account for business-related deposits and withdrawals is likely to be restricted to the small business owner as there are trust and confidentially issues associated with allowing employees to have access to if business and personal finances are merged. This means all financial transactions must be executed by the small business owner, adding another task to the to-do list that could potentially be delegated to an employee.

To create order and boundaries in their lives, small business owners can open a separate banking account for their small business (including a business credit card), and keep separate financial records. The major banks in South Africa have offerings specifically for small businesses, and small business owners can select their preferred option based on comparisons of fees and types of transactions included.

Small business owners can easily upgrade or downgrade their account, or switch to a different bank if their needs are not being met. Small business owners should also be clear about which expenses are business-related and which ones are personal, and pay for these expenses using the appropriate account (or keep track of business use where infrastructure and equipment are used for both business and personal purposes).

 

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5 comments
    This is a very common mistake for start ups... I have come across a number of entrepreneurs who did not have two seperate accounts for their business and personal finances. If the entrepreneur is managingtheir personal and business finances from one account there is a great possibility that the business is not registered with CIPC. This is also an indicator that there is probably a low level of compliance within the business. It is also difficult to determine the health of the business because there is an overlap of expenses... My advise would be to start off by formalising the business operation by first having it registered so that one does not trade informally. Secondly once the registration papers have been issued open a business account. Thirdly pay yourself a salary as the entrepreneur. Once you have paid yourself be disciplined and live within your means and don't tap into the business finances.
    And register for VAT. Many small businesses do not register for VAT because they are below the VAT threshold. But you can voluntarily register for VAT. You should. All of your suppliers will be charging you VAT and you can claim that 14% right back. An when you invoice your customers expect to be charged VAT. If they are the end users they will pay it. If they are buying from you to on-sell they will claim teh VAT back as well. It is an important 14% savings on your cost of goods sold.
    Having a business account with a bank like Nedbank you can get access to a free accounting software that they offer free of charge to their business banking clients. This software is linked to your business account and draws up monthly management accounts which makes it easier to keep track of your business income and expenses. By running as many transactions via EFT through your business account it makes it easier as well to keep proper financial records. If you should use your business debit or check card for other purchases keep the receipts and write behind them any additional information that you may require for compiling your management accounts.
    And following on Thuli's advice having a Pty registered does offer some advantages to small business owners For example you can claim all the personal funds that you use to start the business as a shareholders loan (hyou can even charge your business interest) which means that when your buisiness does take off and can pay it back you can collect the shareholders loan back (you will pay tax on the interest if you charged any). Because your are the principal driving force behind the business you can also tailor the business dealings to suit your circumstances - like having a strategy retreat in Mauritius or taking your clients out golfing. Depending on how you structure it those kind of expenses are all tax deductable. I am not giving any tax advice of course and you should consult a tax professional. But the Government recognizes that it often takes an investment and re-investment in SMEs before they see a profit and you should make the most of all the deductions and benefits that they do give you as once you start making money there is no doubt that they will tax you to the fullest on your net profits.
    I recently found a great 10 step guide on the basics of keeping your finances seperate - I found it very helpful so thought I would share it if anyone else might get some use out of it: 1. Set up separate checking accounts. If you have separate checking accounts and you are diligent about drawing on the right account at the right time come tax time all you have to do is review your bank statements for a clear picture. If you can manage to only use your business debit card and avoid cash you may even be able to do your taxes and other financial reporting straight off your bank statements. 2. Keep separate shoeboxes for your receipts. You don't need to actually use shoeboxes to store receipts (in fact something a little more elaborate is a good idea) but whatever you use should have two physically separate locations for personal receipts and business receipts. If you don't have time to collect and sort both personal and business receipts prioritize your business receipts. The simple truth is that a tax auditor is unlikely to care much about your personal expenses but will be very interested in your business receipts. 3. Get a credit card for the business. Abusiness creditcard will help you build up a credit history for your business separate from your personal credit history. More importantly your credit card is one of the likeliest places for your finances to get muddled. Separate credit cards means that even if there's something a little out of reach of your business' current budget you won't be tempted to use your own credit card. 4. Give yourself a salary and don't exceed it. If you write a check for the same amount every month from your business' checking account to your personal checking account you can make it easier for both your personal finances and your business finances to stay on budget. 5. Set a budget for the business. Just as you don't want to pull more money out of your business than your business can afford you don't want the business to pull more money out ofyouthan you can afford.Many small business owners find themselves pumping money from their personal accounts into their company's whenever there's a shortfall. And sometimes it's unavoidable. But if you have a clear budget based on your business' current earnings you can help avoid both. 6. Make sure your family and partners understand the business' status. It's important to remember that you're not always the only person involved in either your personal finances or your business' finances. Making sure that everyone is on the same page now can prevent problems later on. 7. Understand who is a business expense and who isn't. Among the biggest pitfalls in keeping your finances separate are entertainment food and travel expenses. It's tempting to try to write off as much as you can as a tax deduction but the simple fact is that dinners out with family and friends will not qualify as business expenses no matter how you arrange things. 8. Draw lines between your home and your office. Create a division between your office and your home especially if you work from a home office. Doing so lets you claim the home office deduction as well as divvy up bills. Even if you have a home office your business shouldn't be paying the entire electrical bill for your house. At least part of that burden should fall into your personal finances. 9. Keep logs of business use. If you use a personal item such as your car or your cell phone for business purposes on a regular basis you should be keeping track of the split. Of course life would be easier if you could have a separate car and a separate phone just for your business but if that isn't possible there are plenty of easy logging tools to use especially for smartphones. 10. Talk to a financial professional. If you are at all concerned that you are misclassifying an expense or you're having a hard time keeping your finances separate bring in a pro. He or she will likely be able to help you establish a system that works for your own individual situation.