By Anwuli Chukwurah

3 ways to separate your business and personal expenses as a business owner

You just opened up your first business. All the money your business makes is yours, right?! I mean, why not? You can use the money for whatever you want. No one can tell you what to do with the money. Right?

Wrong. If this is your thinking, you’re on the fast track to a potential audit and massive headaches when tax season comes around. You must despise your accountant if you decide to run your life this way.

A business is a separate entity from you as the owner. Colluding funds by using business funds for personal expenses not only screws up your financial reports but can also be a flag for a potential IRS audit. You have no idea of the profitability of your business and no control over your personal funds. You can’t plan for retirement because you have no idea the difference between your business and personal money. Below are ways you can use to separate your business and personal expenses.

  1. Mindset shift
  2. Separate bank accounts
  3. Separate business and personal budgets

Mindset Shift

As a business owner, I know you feel that the business is yours to do whatever with. But, you must consider the business as a separate entity with its own life cycle. You can’t see the business and you as one. The business has obligations to your vendors, customers, IRS, employees, and other partners. As an individual, you have obligations to yourself, your family, your hobbies, and the rest of your life. Yes, a tiny part of you works in the business, but it’s not the whole of you. This mindset shift is the most difficult thing I see my clients struggle with. Many small business owners start businesses to fulfill personal goals like buying a house, but now that business entity has more oversight (as a legal business). If you decide to apply for government grants or contracts, this separation is even more necessary because your financials will be under scrutiny.

Separate Bank Accounts

Separate personal and business bank accounts are the fastest way to separate your expenses. If your personal and business accounts are with the same bank, make sure you distinguish between the cards. I’ve had clients mistake a business debit/credit card for a personal one because they look the same. You can put a sticker or customize the background to do something noticeable. It’s fine if personal expenses happen infrequently; you can easily pay the business back if it is a mistake. If multiple personal expenses occur every month in the business account, then a conversation will need to be had to help reduce the occurrence. As the owner, if you aren’t on payroll and want to buy something personal, transfer the money from the business account to your personal. Then, that transfer will be classified as an owner’s draw on the balance sheet.

Separate Budgets

Having separate personal and business budgets will help solidify the differences in expenses in your mind. Having a personal budget will let you know how much you need in owner’s draw or payroll from the business each month to live your life. You need a business budget to understand how your business revenue is spent. At the beginning of your business, you’ll want to make enough net profit to pay yourself your breakeven monthly personal expenses.

It’s imperative that you quickly separate your personal expenses from the business. Any future business growth planning will be useless if your financials are inundated with your personal expenses. It will be hard initially, but this discipline is required from you as the business owner.

About the author:

Anwuli Chukwurah is a versatile finance professional with a track record of starting new finance organizations and scaling them for growth in fast-paced entrepreneurial environments. She has over 6+ years of experience working with small business owners, startups, and nonprofit organizations to help connect finance with their business goals. She aims to ensure her clients become comfortable and adept at navigating their numbers. She works with clients at Woolichooks and writes a newsletter for non-finance folks.

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