Separating your business expenses from personal expenses will simplify your life dramatically. Often it is thought by new business owners that having to manage business accounts plus personal accounts will be a nightmare, but this is far from the truth. In fact, it simplifies your accounting and bookkeeping processes dramatically. You will also have a much better idea of the amount of money you spend on your business.
To help small business owners, here are three tips to help you begin separating your personal expenses from your business expenses.
Understand the difference between personal and business expenses
Sometimes the line between business and personal expenses isn’t easy to distinguish. While most of the time you can easily see a link between expenses used solely for your business and expenses solely for personal, some expenses can be both.
If you buy something solely to be used by your business this is a business expense. However, there are some expenses that you use the item both in your business and personally. These could be laptops, cars, phones, etc. In this case, you have to determine what percentage of the total use of the item is for business and what percentage is personal.
Say you use your laptop 60% of the time for business and 40% of the time for personal, you may only be able to claim a deduction for partial use of the item. This is the 60% used for business purposes. For advice on what you can or cannot claim you should talk to your accountant.
Open a business bank account
A business bank account is a must have for any business. It completely separates your private and business expenses, making it far easier to track your expenses. Using your personal account for all of your business expenses results in all these expenses getting mixed up on the same statement. This can make it difficult to determine which transactions were personal and which were for your business.
With a business account, all transactions will be for business purposes. This removes the need to look through every bank statement, highlighting business expenses as every transaction is business related. You can also quickly see how much money your business is spending.
A good option for businesses is to also open a business credit card. This has similar benefits to separating your business expenses from your personal expenses. Now you have easy access to money for some of your business expenses, separating them from personal expenses on your personal credit card.
Buy separate personal and business items
In an ideal world, we would have separate laptops, phones, cars, etc, for business purposes to those we use for personal reasons. Of course, not every business can afford this. But, buying separate items when you can, will make things a lot simpler.
With duplicate items, you no longer have to divide personal use and business use when looking at deductions. It may cost more but, depending on your business size and industry, could make things easier. Talk to your accountant for advice on whether this is the correct path for your business to take.
Separating your business and personal expenses is one of the most important changes any business can make early on. This will enable scalability in your business structure, setting your foundations right. It will also make your bookkeeper’s, your accountant’s, and your own jobs far easier.
For help with managing the books of your business talk to Link Bookkeeping today.