Do you know how to categorize your business purchases?
Many small business owners who are just starting out have the same conundrum; you need something for your household, but you don’t have enough in your personal account, so you just use your business account to make the purchase. Whenever I start working with a new entrepreneur, my first questions is whether they have a separate business bank account and credit card. There are several reasons why you should separate your personal and business finances and I have articulated a few below.
The Canada Revenue Agency (CRA) requires you to keep accurate records for your business and that becomes more difficult to do if you are using your business accounts for personal purchases and your personal accounts and credit cards to cover business purchases. One of the main reasons the CRA requires accurate bookkeeping is that if you are audited, it makes the process go easier if your finances are separated. Your life will be much easier if you keep your personal finances personal and your business finances strictly business.
If you take money out of your business, it should be allocated for paying taxes or taking care of other expenses. If you just take money out of your business account without knowing specifically what it’s going to be used for, you will not have any clarity about how much you can afford to take out at any given time and what that money is going to be used for.
So, how do I separate? I have a few suggestions that will make everything much easier:
- Register a bank account for your business and get a credit card or line of credit as soon as you can. Keep it separate from your personal accounts.
- Be especially mindful when you make purchases and make sure they are made with your different cards or accounts (business vs. personal).
- When you take money out of the business, be methodical about it. Have a monthly balance, salary, or dividend that you give yourself and do not take out any more than that.
- If you find yourself running out of personal funds, resist dipping into your business account to buy personal items. It is not meant to be a secondary bank account for you to use – it is meant to keep your business cash flowing.
With a clear separation between your personal and business finances, you will be able to assess the health of your company, keep your paperwork in order and keep your accountant (who will deal with CRA when the time comes) happy. It is not just you – many business owners have difficulty organizing their expenses and keeping track of multiple accounts and credit cards. I have a system that helps you, the business owner, take control of your purchases. Would you like to find out more?
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