6 EASY STEPS - to Finally Separate your Personal & Business Expenses
Got a side hustle – started a small business or growing quickly but still can’t work it out? Read on!
One of the largest issues with small businesses is the commingling of personal and business finances, this includes both cash coming in to the business and cash leaving the business. The intermingling of finances makes it extremely difficult to keep track of and tax time is a nightmare!
In most situations it’s the expenditure part that is the largest issue given that many cross over between day to day living expenses and are also used for Business.
So how do you separate the two?
Step 1.
First of all – if your accountant hasn’t advised you too – or you’re still in start-up phase and don’t have an accountant - set up a separate bank account and credit card (only if needed). If you are a sole trader – and already have a few bank accounts then isolate one just for business.
Step 2.
Make sure that ONLY your business expenditure is coming out of your business bank accounts and credit card. Change Direct Debits, BPAY’s whatever needs to be done to separate these once and for all.
Step 3.
If you have accounting software, more often than not it will have the ability to link to your business account and credit card – get some help from a book keeper if this parts too icky – but once set up it should automate the recording of 80% of your expenditure! Yay!
Step 4.
Looking at your business expenses, ask yourself honestly:
If I didn’t have a business would I still have this expense?
If the answer is YES – then it’s a private expense! Yes, I know, it might be tax deductible – but the answer is still NO – it’s a private expense so you can keep your business records separate and truly understand how well your business is performing and also what your own TRUE personal expenses are.
You may very well be saving money by using your personal phone for business, but that isn’t the point of this step….
You are now left with your TRUE business expenses.
Step 5.
Now, look at the expenses that are left in your business and ask yourself – can your business operate on these expenses alone?
If the answer is no – (maybe you have taken the internet and phone out of the business expenses) – then you have a two options:
1) Work out how much you use for business and how much you use for private use, then;
Pay that percentage/dollar amount of the service from your business account and the balance from your private account; The advantage of this is that it will automatically push through the correct amount of business expenditure into your accounting system. If its a fixed amount you can set up a recurring payment in your bank to make it easier!; alternatively you could;
Treat yourself as an employee and once you pay your private bill – put in an expense claim for the business to pay you back.
2) Take out the service or purchase a duplicate product for your business and keep your private service completely separate!
Step 6.
Pay yourself a salary! This not only maintains a regularity for you on the personal expenses front, but keeps the book keeping cleaner and cash flow more predictable. If you have put in a substantial amount of owner funds, then this ‘salary’ may be taken as a loan repayment – but all the same – make it a fixed amount so you can also reliably manage your personal budget!
If you follow these steps you can more accurately:
understand the true profitability of your business;
analyse if your expenditure is too high or revenue to low
work out how much salary you can pay yourself;
You will already have completed 90% of preparation for compiling your tax return! And the best part is….
Your accountant will love YOU and YOU will be super PROUD of yourself! Go Girl!
- Coach Rach
P.S Bonus Tip – when looking at step 5 – also have a look and truly honestly ask yourself – is this a necessary expense?? – if the answer is NO – then get rid of it! Your bottom line will thank you for it!
