budget

Why It’s Important to Keep Business and Personal Finances Separate

“Don’t mix business and personal finances,” is one of the most common pieces of advice given to business owners. And for good reason. Many business expenses can be deducted from your taxes but most personal ones cannot be. So when personal expenses get recorded in your business’s financial records, you're setting yourself up for trouble later on.

It’s important to make it as easy as possible for your preparer to file your business’s taxes. Asking them to sort through a combination of business and personal records isn’t the best use of the time you pay them for. If you can hand over a clean set of books that have all your business expenses accurately recorded, they’ll be able to spend more time preparing the best possible tax filing for you.

Business records should also be an indicator of how well your business is performing. But when your books are muddled with personal expenses too, it’s hard to make sense of your cashflow. You should be able to get a strong understanding of your finances through regular bank reconciliation. However, you’re creating more work for yourself if you have to first separate your business transactions from your personal ones.

Now that you know why keeping business and personal funds separate is important, here are a few tips on how it can easily be done.

Open a bank account for your business

Opening a dedicated business bank account should be one of the first things you do when launching a business. Right from the start, all your bills and expenses should be paid out of your business account and all your revenue should be deposited into it. This makes for accurate and simple record keeping, since all your funds are moving through a single account.

Pay yourself a salary

Your business likely has a better chance of succeeding if you pay yourself a consistent salary instead of pulling money from your business account at random times. It helps you stay on budget, which is crucial to achieving long-term success.

Apply for a business credit card

Having a business credit card can be beneficial, especially if you’re on the move for work and need to make a lot of purchases while out. You can pay the balance directly from your business bank account, which keeps your record keeping efficient. And you have the added benefit of building strong credit for your business.

Be careful of the gray areas

There are going to be times when you spend money for both business and personal reasons. Maybe you pick up snacks for your office along with groceries for your home or pay for your significant other to join you on a business trip. Situations like these occur often and need to be expensed properly. A tax professional can help you get the deductions you’re entitled to without skirting the law.

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How To Create A Budget That Can Be Your Business’s Roadmap

By Lauren Crum  Email Lauren

Some accountants compare a business’s budget to a roadmap or GPS directions. They use this analogy because your budget guides you towards your goals. If you don’t have a budget, your business probably won’t get to where you aspire it to be.

Now is the time to create your budget for 2016. The first step is to estimate your revenue for the coming year. The easiest way to do this is to take your sales from 2015 and incorporate price increases and trends you expect to encounter in 2016. The estimate you develop will be your target revenue for the year. It should be ambitious but also realistically achievable.  

The next step is to project your operating costs. These can be pulled directly from your profit and loss statements (P&Ls). Costs are either fixed, variable or semi-variable. Fixed costs will remain the same whether sales rise or fall so they are the easiest to incorporate in your budget. Some examples of fixed costs are rent, depreciation, and insurance.

Variable costs are completely dependent on sales. Some examples are royalties, labor costs and manufacturing costs. You can calculate these costs as a percentage of prior year sales when creating your new annual budget.

Semi-variable costs are fixed to some degree, but also increase with sales. An example of this is overtime pay. Semi-variable costs are the hardest of all the expenses to project so it’s a good rule of thumb to always be conservative when estimating.

Once you subtract your projected operating expenses from your estimated sales, you’ll arrive at your projected profits for the year. With these estimates, you can plan for the coming year and make important decisions like whether you can purchase new equipment, move to a bigger location, add staff, or give your employees bonuses or raises.

A budget should be created at least every year. Most budgets are divided into 12 months and have blank columns next to your estimates that can be filled in with actual results as the year progresses. You may want to consult an accountant when preparing a budget or you can attempt it yourself using software or online resources (Microsoft offers a number of resources for creating a budget). Just remember that it's important to use realistic figures and make adjustments throughout the year.