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One of the most important financial tasks for any small business owner is managing your expenses.
As an entrepreneur, we often hear, “don’t mix business with pleasure.” Not only is that true for our relationships but it also applies to our expenses. It is crucial to keep track of all business and personal expenses, as well as to understand the difference between the two. Keeping these expenses separate not only provides a clear picture of your business’ efficiency and profits but also saves you a major headache when filing your taxes.
In this blog, we will discuss the importance of managing business and personal expenses as well as some practical tips on keeping your expenses organized.
Small business owners should keep their business and personal expenses separate for the following reasons:
Accurate Financial Records
The first reason why small business owners should keep their business and personal expenses separate is to maintain accurate financial records. By doing so, it becomes easier to track your business’ profits and monitor cash flow. This information is crucial and can help you make decisions on the future of your business, such as hiring another employee, expanding your physical spaces, investing into marketing and even determining where to cut costs.
Moreover, separating business and personal expenses makes it easier to create accurate financial statements, such as balance sheets, income statements, and cash flow projections. This information is not only useful for you, the business owner, but also for potential lenders, investors, and other stakeholders who are considering supporting your business.
All this to say, if you’re not tracking your expenses, is your business really making as much money as it possibly could?
Another important reason why small business owners should separate their business and personal expenses is for tax purposes. When you expense something for work, you reduce the amount of taxable income you pay taxes towards, i.e. you pay less taxes and save more money.
Additionally, businesses are eligible for tax deductions for business expenses, including equipment, supplies, and operating expenses. By separating business and personal expenses, small business owners can easily identify which deductions they qualify for and take advantage of them.
Having accurate financial records can also help small business owners avoid audits and other tax-related problems. The Internal Revenue Service (IRS) and other tax authorities often ask for documentation of business expenses, and failing to keep accurate records can result in fines and penalties.
Pro Tip: For more information on tax deductions for your business speak to your local tax authorities or accountant.
Separating business and personal expenses can help small business owners build credibility with lenders, investors, and other stakeholders. It shows that your business is organized and financially responsible, and you are committed to your business’ success.
Demonstrating that you have a clear understanding of your business’s financial situation helps instill confidence in potential lenders or investors. This information can help you secure funding, investment, and other forms of support that are crucial for the success of the business.
In many countries, it is a legal requirement to maintain accurate financial records for businesses, including separating business and personal expenses. Failure to do so can result in legal penalties and fines.
For example, small business owners who fail to keep accurate financial records can face fines and penalties. Additionally, they may be subject to civil and criminal charges for tax fraud, embezzlement, and other financial crimes.
The IRS considers a variety of expenses to be deductible as business expenses, as long as they are considered ordinary and necessary for the operation of the business.
Some common business expense categories include:
Still confused about what qualifies as a business expense? Read our full guide on expenses and how to distinguish between business and personal.
Now the age old question, “Do I need a separate business bank account if I’m just starting my business?”
No, but you do need to keep your expenses separate.
In the past, opening a business bank account was an easy way to keep your business expenses separate from your personal ones…as long as you remember to use your separate cards.
However, oftentimes small business owners forget and they use their business credit card for personal purchases or vice-versa. Don’t stress, it happens.
With TrulySmall Expenses, we’ll help you keep track and separate both types of expenses and save you from all the headaches!
All you need to do is enter your expense into your TrulySmall Expenses account, categorize it as either business or personal and that’s it!
We’ll keep your expenses separate and send that information into the appropriate dashboard for you to review. Keep business and pleasure separate without having to set up a bank appointment.
In conclusion, separating business and personal expenses is an important step that small business owners should take to ensure the success of your business. By keeping accurate financial records, you can take advantage of tax benefits, improve your professional credibility and most importantly earn more money.
Managing business and personal expenses may seem like a daunting task, but it is an essential part of running a successful business. With TrulySmall expenses, you can now keep your business and personal expenses separate without having to open a business bank account.
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