In thinking about this topic lately, I ran across this article and it made sense to me. I don’t have a separate bank account since I see it as salary, and everything comes out of my one source, but it seems like it could make things alot simpler!
Personal finances, meet business finances. He and you are the same person in reality, but separate on paper.
Wait, what? Financial schizophrenia is a good thing?
Yep! One of the biggest mistakes design entrepreneurs make is combining their personal and business finances. Not only is it very difficult to budget for both personal and business expenses, but also you open yourself up to a host of problems (and probably hefty tax bills!) should the IRS ever come knocking on your door.
Not sure where to begin? If you have an accountant, ask him/her for their advice. Chances are they’ve already got (the two of) you living in harmony. Otherwise, follow these steps:
#1: Get a Separate Checking Account
Go to the bank and ask to open a free checking account in your name (as long as you’re a sole proprietor, you don’t need an official business account. Just another account with your name on it will do. The rules change when it comes to LLCs and corporations, of course). Get a debit card for that specific account, or if you prefer to buy checks, purchase them through the Sunday paper ads or directly online as they’re usually cheaper than from the bank.
#2: Separate your Finances
Anything related to your business ought to be purchased from or deposited into the business account; likewise for anything personal in the personal account.
When you need money in the other account, transfer money between the accounts using the term “Owner’s Draw” for withdrawals from the business account and “Owner’s Contribution” for contributions from the personal account to the business account.
If you simply cannot avoid having to pay for something out of the wrong account, save your receipts and reimburse the other account. This way you are tracking all of the business’ income and expenditures for the clearest picture of how your business is faring.
TIP: If you pay for too much for the business out of your personal account and/or vice versa and haven’t recorded it well, this invites the IRS (in an audit) to poke through your personal life (bank accounts, expenditures, income, etc.) as well as your business to see what else you may have hiding in your records.
#3: Track your Business Money
Find an accounting program that works well for you. The internet has many online applications created for simple small business accounting, often for a free trial period or free with restrictions. A few include FreshBooks, Xero, or Kashoo, but there are many to choose from. Also, you can use traditional software such as QuickBooks, Peachtree, Bookkeeper, or Simply Accounting. Again, if you have an accountant, talk with them about which programs integrate best into their tax software to reduce your bill!
Why track your money? To become a more efficient, wise, and informed entrepreneur! Keeping excellent records takes time, but it’s the only way to determine whether your business is growing, shrinking, spending too much on meals, or can afford a new high-end printer based on average net income and expenditures.