Best practices for business and personal finances
30 Aug 2023
Mixing personal and business finances is a common mistake that many entrepreneurs, freelancers, and small business owners make.
Whilst it may seem convenient at first, there can be long-term repercussions, affecting your tax obligations, financial planning, and even your business’s credibility.
One of the primary reasons to separate personal and business finances is to simplify the accounting process.
By keeping separate accounts, it becomes far easier to track business expenses, calculate profit and loss, and prepare for tax deadlines.
Better financial analysis
With separate accounts, you can quickly assess the financial health of your business without the distraction of personal transactions.
Key performance indicators such as liquidity ratios, working capital, and gross margin become easier to calculate.
Easier tax compliance
Tax obligations for business and personal finances differ significantly. Using a single account for both can lead to incorrect tax filings.
Furthermore, if you are investigated by HM Revenue & Customs (HMRC), then your affairs will already be in order to show them.
Maintaining a clear boundary between personal and business finances enhances the professional image of your business.
When dealing with clients, vendors, and financial institutions, a dedicated business account lends credibility and shows operational integrity.
Open a business bank account
The first step in separating personal and business finances is to open a dedicated business bank account. Make all business-related transactions—be it income or expenditure—through this account.
Use a business credit card
To keep track of business expenses more effectively, consider using a business credit card. This helps monitor business-related costs and makes it easier to account for them when organising your taxes.
Maintain separate record-keeping
Keep distinct sets of books, accounting software, or spreadsheets for your personal and business finances.
You may want to hire an accountant to simplify this process for you.
Draw a salary
As a business owner, you can decide to pay yourself with a salary or take dividends from the business, providing the business is making a profit.
When deciding how to structure your pay between dividends and salary, there are tax considerations that must be taken into account.
Regardless of the balance you choose, ensuring you have a process in place to keep track of payments is essential.
Ensuring you keep your personal and business accounts separate will make this easier to manage.
If you would like further advice about your personal and business accounts, please contact us today.