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The thing about starting your own company is that it’s so much more than coming up with a great idea.

In addition to putting together a solid business plan, you’ll also need to meticulously organize all the legal and financial technicalities. And this can be quite an intimidating task.

Regardless of whether you want to do freelance work, set up an online shop, or run a startup, you’ll want to keep your personal and business finances separate.

Why Is Separating Finances Essential?

Let’s put it this way: imagine being employed by a company that gives you your employee credit card to cover work-related expenses. You probably shouldn’t use this card to finance a trip to Disneyworld for your extended family. Or to go on a shopping spree. And to be honest, if you were the employer, you wouldn’t be too thrilled with an employee who used company assets in this way, right?

So how exactly does this relate to your own company? Well, you need to remember that when you’re an entrepreneur, you’re both the employer and the employee.

This means that setting some financial ground rules is a vital part of your business strategy.

The main such rule is not allowing your spending habits to deter you from reaching your professional goals. Just like you wouldn’t turn up at an important client meeting wearing your pyjamas (unless you’re Kanye), you shouldn’t let poor financial hygiene influence the success of your professional endeavours.

Further reasons to avoid commingling funds include easier tax filings, lower likelihood of being audited, and better success rates when applying for business loans. In addition to better end-year results, healthy financial practices can greatly contribute to a more satisfying life-work balance.

If you’ve decided to make this step an integral part of your daily routine, here are a few hacks that will help you separate professional and personal expenses and keep you away from risk.

Maintaining Records-Financial Hacks

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1) Define the Legalities

The first step towards achieving a separate status between your personal and company finances is to register your business as a legal entity.

The procedure and requirements will depend on your location, as well as the type of structure you opt for. This will also determine the documents you’ll need to provide and the associated costs. If you’re unsure whether an LLC, C Corp, or S Corp will work best for you, it’s not a bad idea to talk to a financial advisor or an experienced accountant or bookkeeper who can advise you on the benefits and drawbacks of each option.

The reason why registering as a legal entity is so important is that it provides you with security in the form of personal liability protection, along with legal and tax benefits. If things go south, and you’ve registered your company, you’ll find that your assets won’t be affected by debt, loss, or even lawsuits.

For most business owners, this type of protection ensures peace of mind, allowing them to focus their energy on securing results, instead of worrying about possible pitfalls.

2) Separate Your Bank Accounts

The next important step you will want to take is to open a bank account specifically for work.

This financial hack is crucial for your future financial plans. Different personal and business accounts ensure that all transactions are automatically categorized, saving time and effort when it comes to tax filings.

Typically, you’ll want this to be a checking account designed for everyday use, that has no withdrawal restrictions, and offers features such as automatic bill payments.

Financial HacksSource: depositphotos.com (free to use and share)

If you feel like you need one, you can also apply for a business credit card you can use for expenses that are to do with your work. This includes all small and medium purchases, such as office supplies, lunch meetings, and travel expenses. Credit cards can also offer benefits and perks you may find valuable, including travel miles and cash-back rewards. They’re also an important block in building credit for your company, for all plans.

3) Plan for Growth

Though it may seem far down the line, there will come a time when you’ll want to expand your business, launch a new product, or purchase new equipment.

Big investments are best not financed by putting them on a credit card, though. Even less of an ideal solution would be dipping into your personal savings account.

So if you’re reluctant to go to a bank for a loan, due to lengthy procedures and low success rates, you can consider the options for alternative financing. These are the ideal solution for several entrepreneurs, as you can choose the repayment terms that suit you best.

Taking Notes-Financial HacksSource: depositphotos.com (free to use and share)

But, what several people forget about is that this type of financing requires transparency and reliability above else. If your personal and professional finances are all jumbled together, securing this capital could be considerably more difficult than if you keep them partitioned.

4) Keep a Close Eye on Cash Flow

Once you start earning money (and creating expenses), monitoring your cash flow is an absolute must. Not only do you need to do this to keep track of your accounts receivable and accounts payable, but a good cash flow strategy is crucial when planning for growth and expansion.

In addition to taking the time to study your income statements and balance sheets, it’s also advisable that you determine your salary and make monthly payments. For most small and medium business owners, this is the most important thing that will keep their finances from commingling.

Not only does this financial hack give you a clear idea of how much you have at your disposal each month for your household budget, but it should also discourage you from reaching for your business credit card when making personal purchases (and vice versa). Although it may require you to make some cuts personally, it’s one of the surefire ways to ensure you’re not living beyond your means by sacrificing your professional finances.

5) Track Expenses

When it comes to the financial aspects of running a company, you have to remember that there’s zero space for being sloppy.

Aside from entrepreneurial spirit, running an up-and-coming business requires serious organizational skills. You need to stay on top of assignments, meetings, expenses, make time for networking, and still have enough time to do your actual job.

One of the ways you can save a good chunk of time during tax season is to not fall back with your bookkeeping. Experts recommend going through all your expenses once a week, or at least once a month. This way, all the data you require is readily available and properly recorded.

Many freelancers, as well as SMBs, rely on accounting software and apps that help streamline the tracking process and offer several features, including training and live support.

Budgeting and Planning-Financial HacksSource: freepik.com (free to use and share)

Because most small businesses do include a great deal of overlap between personal and professional finances, there are two types of expenses you will want to track:

  1. Business expenses – all spending related to the running of your company, including, but not limited to, office space costs, supplies, equipment, software, representation expenses, etc.
  2. Shared expenses – if you use your car to get to and from work, or use the same phone for private and work-related calls, you’ll want to record and label these expenses correctly. That way, you’ll avoid hours of going through your bank statements looking for possible business costs.

If you manage to keep track and separate these expenses, you’ll find yourself prepared for any situation, including audits. Still, to keep (most) surprises at bay, you’ll find that regularly consulting the IRS Tax Calendar for Businesses and Self-Employed makes things a bit easier.

6) Have a Trusted Bookkeeper

Unless you’re really into numbers and like to keep your books, it’s highly recommended that you pay a professional to do this type of work.

Make sure you choose someone you trust, and who has experience in your field, as they’ll have industry-specific tips and tricks that will make your life so much easier. They’ll also be able to catch common bookkeeping mistakes you may not even know you’re making.

7) Physical Separation

This is for all those business owners who work from home, even if it’s only occasionally.

Having a dedicated space for doing your work does much more than allowing you to focus. It keeps a physical separation between your personal and professional lives, thus helping your personal and business finances stay separate.

One piece of advice we’ve already covered has to do with tracking your expenses. Keep in mind that this is a million times easier to do if you physically separate receipts as well.

If you store most of your documents on the cloud, consider purchasing a plan solely dedicated to your professional documentation. This way, important papers won’t get lost in a sea of personal files and vacation photos. Plus, they’ll be available from all your devices (fantastic for those of us who are no strangers to spilling coffee on our laptops).

8) Create an Exit Strategy

Finally, being a successful entrepreneur means knowing when to stop.

If you’ve been in a rough patch for quite some time, have depleted your funds by pumping them into your company, or are ready to move on, it’s great to have an exit strategy you can follow.

An Exit SignSource: unsplash.com (free to use and share)

But bad financial results are not the only reason to call it quits. If you find you’ve developed a trusted brand with a good following but are worried (or simply unenthusiastic) about the future, you might want to consider selling your business. This will be much easier to do if your finances are well organized.

Most small business owners dread thinking about an exit strategy, but keep in mind that it’s a good way to assess risks and prepare for both negative and positive challenges you may face. An effective exit strategy can help you make informed decisions based on your financial performance, allowing you to get the most out of your invested time and money.

Plus, it allows you to dedicate yourself to new projects where you can implement all your existing knowledge and experience.

Conclusion

Like a BossSource: unsplash.com (free to use and share)

There you have it, our top financial hacks that will help you keep your personal and business finances separate.

With good financial hygiene, you’ll have more time to do what you love, while your company will be able to grow and flourish. You’ll also be more organized and less likely to be overwhelmed by tax season.

And perhaps most importantly, you will have peace in knowing that your assets are secure against liability should things start to go south.

Written By
Natasha Lane is a web designer, lady of a pen, paper and keyboard and one hell of a tech geek. She is always happy to collaborate with awesome blogs and share her knowledge about IT, digital marketing and technology trends via creating high-quality content. To see what Natasha is up to next, check out her Twitter dashboard.

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