Why Separate Your Personal Finances from Business

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Stella Sata
I discuss 3 Proven Reasons Why you Should Distinguish Your Personal from Business Finances With Immediate Effect. Cash-flow management will be a critical aspect for business owners with the current Covid-19 pandemic, if you have been using your business account to cover both personal and business expenses without distinguishing the two, you might need to reconsider that.

 

Whose Today’s Guest?

Stella Sata Rukayi is a personal finance coach.

Difference between Personal and Business Finances

Personal finances are finances that you use for your own individual or family needs, these may include things like your rentals, school fees, etc. Business finances on the other hand are finances that you use in order to grow your business or invest in it.

In terms of income, your personal finances can be things like your salary while business finances can be defined as those finances that come from the sale of goods or services.

Importance of Separating the Two

Most business owners are registered as sole proprietors, which in simple terms entails that they are the business. This often gets business owners thinking that there is no need to separate the two but the fact is if you are going to let your business grow as there is a need to distinguish the money you use for your home and the one that you use for your business.

It is important because if you keep removing finances to fund personal needs your business may end up not growing and you will end up running a hand-to-mouth kind of business. Rather than implicate yourself in such it would be better for you to separate the two by paying yourself a salary to meet your personal needs while the rest is left to meet all the business needs and enable growth and business retention.

Dangers of Using Business Finances to Funds Personal Needs

One of the implications of constantly doing this is that the cash flow of the business will really go down, lets imagine that you run a printing shop and one of your machines breaks down, you seek to have it repaired but you are running low on finances because you have been dipping in the business finances for personal needs which ultimately may bring your business to a standstill.

Every business needs a positive cash flow for it to deal with unforeseen circumstances.

Risk of Maintain One Account for Both your Personal and Business Finances

This may become an issue when trying to access finances from a financial institution as it won’t be clear enough to tell whether your business is making a profit or not. The ideal situation would be to have two separate accounts where these funds and you are strict enough to ensure that the finances always go into their respective accounts.

Paying yourself a salary will help dispel the notion of your business income being your own.

Practical Measures

  • Have two separate accounts for your business and personal transactions, this will help you have more accountability for your finances.
  • Always keep records, have a book or excel sheet where you can write what is coming in and what is going out of the business, and ensure that it matches with what is reflecting in your bank account
  • Pay yourself a salary or a director’s fee, this will allow you to have an income that you can use to meet your personal needs.

Knowing How Much to Pay Yourself

Obviously in the first few months, one cannot pay him/herself the industry standard because the business is still trying to grow. You will need to assess the needs of the business and your own personal needs and determine what the middle ground for these two is.

If the business needs much of the funds then 20% of the funds may go to the entrepreneur while the rest goes to the business. It is much more advisable to be conservative with how much you pay yourself in the first few months to allow the business to grow and be able to afford you.

Key Insights:

  • Separate your business from personal finances.
  • Failure to distinguish the two will lead to your cash flow drying and stunting your business growth.
  • There two ways to separate your finances, you can open two separate accounts one for your business and the other for your personal finances or you can begin to pay yourself a salary to distinguish the two.

“Being a sole proprietor doesn’t mean there is no need to separate your personal from business finances”

Insight Partners Africa— aims to bring you actionable insights from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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