This month is all about financial priorities so I’m going to tell you the number one, most important thing you should do when you set up your business. Really, if you do nothing else for the financial health of your business do this one thing:
Set up a separate, exclusive business account
Not mind-blown? Yea, it’s true. Setting up a separate business account for your business is pretty basic BUT you would be surprised how many people don’t do this one, very easy, very important thing.
Also, did you notice that I didn’t say separate business checking account? That’s because I’m not just talking about a checking account. I’m also talking about a separate business savings account and credit card(s). If you use it for your business- separate it.
Ugh, but is it really that important to have all those separate accounts? I hate having to manage all that.
Friends, I’m saying this with all the love in the world for you: Too bad.
Separating your business and personal accounts is not only a good (and expected) business practice, it also will massively improve your understanding of your business finances and profitability. Oh, and you’ll save money.
Did I pique your interest with that last one? Yup, I’m dangling that carrot- the money saving, spend less, get more bang for your buck carrot.
Here are four ways separating your business accounts saves you money:
Makes Accounting Waaaaaay Easier
Having separate business accounts makes your record keeping process a lot more straightforward and less time-consuming. Why? Because instead of having to figure out if that lunch 3 weeks ago was business or personal- you know, without a doubt, if it’s in your business account, it’s business.
Tracking business expenses requires two questions- Is it business related? What deduction category is it? When you have a separate business account you automatically answer the first question. You’re automatically 50% done with your work.
So, just by opening a business account (and using it) you’ve reduced the work that goes into tracking your expenses. No more rifling through receipts, going back to check calendars for meeting schedules or logging into Amazon to figure out what on earth you ordered.
What can you do with all that extra time you aren’t spending sorting through your expenses? You can use those hours to for billable services or work on creating products that you sell. You can use that time makes money.
If you hire someone to do your books, having a separate business account can save you big bucks. Let’s have a little story time:
I have a client who, in our first year working together, all of her accounts were mixed. I was hired to catch up the previous year, which took me 25 hours because of the time required to sort through her business and personal expenses. Not to mention that then she had to go through 4 reports to further clarify her expenses. #notfun
The second year, at my pleading, she began to use her business account exclusively for business. It took me 18 hours to do her books that a year. Just by having exclusive business accounts my billable hours were reduced by more than a quarter.
To recap- having a separate business account saves you time that you can use to make money and saves your bookkeeper time so you pay them less.If you do nothing else for your business do this one thing: set up a separate business accountClick To Tweet
Less Missed Deductions
You know what happens when you’re up late trying to finally take care of your business bookkeepingg and you have 6 months of statements to go through and you’re exhausted and all you want is to just be done? You stop being as thorough and start just trying to get it over with.
Enter: Missed Deductions.
Honestly, it’s really hard to catch every deduction when you’re accounts are mixed. There are just too many expenses and too many expenses that look alike. Something inevitably falls through the cracks.
Missing deductions costs you money. You don’t pay out of pocket for these but you do pay at tax time. Deductions are directly related to how much taxes you pay as a self-employed person, so the more you miss, the more you pay.
When you have a separate business account you can’t miss anything. It’s all there on one statement. All you need to do is categorize the expense and input it into an accounting program.
Here’s another thing- please- for the love of kittens- if you open a business account transfer all your business related auto-debits over to that account. Make sure you update your card numbers. Get your business expenses out of your personal account because I promise you, you want those deductions.
More Write Offs
Did you know you can write off your bank service charges, credit card fees, and finance charges? It’s true! But, there’s a catch. These accounts have to be business-use only.
Ahhhhhhhhh. Now you see why, earlier, I mentioned savings and credit card accounts. Because those accounts have fees. And you want to write off those fees. But you can’t write off those fees if you’re buying dog food with the same credit card you use to pay for your website hosting.
If you do have separate business accounts, here’s what you can write off:
Bank service charges- monthly service fees, ATM fees, overdraft fees, return check fees
Credit Card Fees- Annual fee, late fee, foreign transaction fee (because you’re only using this card for business travel, right?)
Sometimes adding up these fees can total upwards to the thousands, so writing them off is a major benefit to you. Remember, the more deductions you have a tax time, the less you will owe. Which means there will be more money to put towards the baby grand piano you’ve always wanted.
Protects You in an Audit
Okay, this is hypothetically saving of money, but seriously, if you are audited and have a mixed personal and business account, you will most likely be spending a lot of time and money to deal with it.
The IRS likes separation. They like it when they don’t have to go through your receipts for socks and underwear in order to find your receipt for printer ink. They loathe mixed-use accounts and, in an audit, the last thing you want is an irritated auditor.
You want your accounts to be pristine. You want them to look like pinnacles of business record keeping- neat, transparent, and well organized. A mixed-use account is none of those things. In fact, it’s the opposite.
Consider opening a separate business account as a preventative health measure- but the health we’re talking about is your financial health.
Now go forth and open that baby up!