You might know why to separate your personal and business finances, but there are more ways than one to do it. All of these can help you create a bigger separation, making it easier to manage the money coming into and going out of your business. And all can be considered by small businesses.
1. Set yourself up as a limited business
Sole traders who need extra impetus to separate their personal and commercial finances could think about becoming a limited business. As a sole trader, there’s little distinction between you and the business — any company debts become your debts, putting personal assets (like your house) at risk.
Limited businesses on the other hand are their own legal entity, splitting what liability belongs to you and what doesn’t. They can also pay dividends to their shareholders (i.e. you) from any profits. Both of these are solid wins from a financial point of view.
The final thing to consider is that having a limited company gives the impression of a fully-fledged, structured venture. This credibility can make all the difference in some sectors where clients don’t work with sole traders because of a lack of legal protection.
2. Get a business bank account
Limited businesses are required by law to separate their personal and business finances, but sole traders can still get (and benefit from) a business bank account. The main perk of one is that it acts as a visible divide, securing the business’s cash so that it’s much easier to track company spending, send tax returns, claim back VAT and so on. Day-to-day, this is probably the most effective way to create separation.
3. Get a business credit card
A business credit card helps your venture build up a positive credit history that’s separate from your own. It also ensures that when you need to make an emergency purchase, you do it without the risk of financial records getting muddled and your own finances being impacted.
4. Pay yourself a salary
There are so many reasons you shouldn’t forgo a steady income as the head of your company. By setting aside a specific salary sum, you:
- Create an outgoing that’s fixed and easier to track
- Safeguard your personal future (and consequently the business’s)
- Build a credible identity as “the boss”, which looks good to investors and banks
- Open a new cash pot to potentially be used for business growth
5. Use accounting software
One of the many benefits you get with online accounting platforms like Xero and Zoho Books is visibility into your projected incomings and outgoings. This is especially helpful if you decide not to split your finances into separate bank accounts, because it helps you track how much of your balance is yours vs your business’s. For example, if you can clearly see the gradual increase of your tax bill, you can always make sure cash is safely put aside.
6. Set up a business budget
It’s easy to overspend without a clear idea of your business’s financial limits, so every owner should have an idea of their monthly, weekly and even daily budget. The more granular it is, the more likely you’ll stick to it and lessen the risk of having to pump personal finances into the company.
We’ve already created some tips for setting a budget to benefit your small business.
7. Rethink working from home
There are many ways that working from home can be healthy, both for you and your business’s financial matters. But it can get hard to manage any separation of funds when the line between personal and professional is blurred. If your home-working habits become slack, everything is affected — from your productivity, to your management approach, to your finances.
There are some easy ways to improve the way you work from home that will help you treat your personal and business finances with more respect:
- Set schedules and daily routines
- Clearly separate your home and work spaces
- Create a professional environment
- Find ways to stay active and focused
8. Find a helping hand
If you don’t feel like you have the time to follow all of the steps above, there are professionals who can do it for you — whether that’s an accountant to do the separation of finances for you, or someone who can rearrange, redecorate and refurnish your home workspace.
This article is intended to offer helpful guidance and does not constitute qualified financial or legal advice. Please consult an independent legal or financial advisor, if you have any questions pertaining to your business.
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