Small Biz Hack: How to Separate Business and Personal Finances

Your earnings are inconsistent, so you spend as the money comes. When business is good, you’re okay, when it’s going through a rough patch, you could sell Jesus.

Have you found yourself in such a situation? When you draw all your expenses from one place and can’t seem to grasp where your money actually goes when you are back to accounting. 

This is a common problem among many self-employed businesspeople in Kenya and even across the world. Starting out, many entrepreneurs fail to distinguish between business finances and what they are at luxury to spend. 

You may even have two sources of business income, but at the end of the day, you can't account for which was applied to what expenditure. You can't seem to know which is on what trajectory, better yet, you have a faint idea of how profitable they are individually.

Worry not, this problem not only dogs rookies in business but also longtime businessmen. After years of being in business, some may find themselves without savings, living hand to mouth, hopping from income to income to fund an inconsistent lifestyle.

If you are a small business owner, accountability and self-awareness is key if you are to stand a chance at financial success. There has to be a clear distinction between your business finances and personal money - otherwise, you will always be wondering, just like observers would, where your money goes. 

Why Separate Personal and Business Finances?

No matter how small your business is, keeping business finances separate from personal money is of absolute importance if you want your income to grow. Some of the reasons to do so include:- 

1. Legal implications and personal assets exposure

If your personal finances and business finances are muddled up, in the event that your business is sued and there is a need to seize business assets to either repay a loan or settle a suit, your personal assets may be at risk.
This is especially true if you are operating a sole proprietorship, a non-limited partnership and non-limited company company where the business and its owner(s) are legally the same entity. 

2. Business Financing

Many small businesses depend on credit to either expand, cover for limited cash flow, fulfil big orders and so on. You are likely to already have taken one loan or the other to improve the chances of your business making a profit. 

Lenders will typically analyse your business records to determine how much you can qualify for, whether you even can qualify and how risky a borrower you are. 

If your personal and business finances are bungled up, you keep using business income for personal discretions etc. this could jeopardise your chances of getting the loan that you need to keep your business profitable.
‍
Read Also: 5 Things the Bank Will Ask When You Need a Business Loan

3. General business sanity

Having your personal business and personal finances mixed up, is in the very least simply being disorganised. It is likely that you do not also have proper records of how your business is doing especially in regards to future growth. 

You are likely to lose track of your business deliverables when personal needs come calling. You probably will have problems prioritising needs as personal needs may sometimes feel more urgent than business needs. 

Diverting business revenue to personal needs may introduce serious cash flow problems that could jeopardise the very viability of the business that is supposed to feed you. 

If personal emergencies happen, for example, you may overlook the need to raise funds from other sources when the cash till is full of ‘unutilised money’ drawing from which you are starving your business and stunting it’s growth.

Plus, don’t you just want to have the peace of mind of knowing where your business is financially at the glance of your books? 

Tips to Separating Personal and Business Finances

1. Open a business bank account

It is absolutely important to separate your personal finances from your business earnings. The first step to realising this is by having a personal current account and a business account.

Doing this allows you to maintain clean and accurate bookkeeping for your business. A business account enables you to collect and make payments, buy materials and equipment, among several other business-related activities. 

By having your books in order, you will be able to keep track of your business’ individual growth, its profitability, trajectory, and taxation.

2. Separate your receipts

Storing your receipts is a good way to manage your finances. Keeping a file with receipts of expenditures, tax deductions, among other expenses.

While operating a business, there are several shared expenses between your business and personal needs. In the event the two have to cross paths, ensure you keep receipts to account for the spending. 

3. Pay yourself a salary

To easily manage your personal expenditure without necessarily dipping into your business accounts, you need to start paying yourself a fixed salary which you can spend on yourself and family. This will make it easier to separate personal earnings from business profits, keeping your expenditure in check.

Since you work at your business, it makes sense to pay yourself a salary. Just like you would pay employees, make it a habit to pay yourself a fixed income either at the end of the month or every two weeks. Make it structured and realistic.

This helps you resist the urge to hive off business finances in case you need to spend on something.

4. Set a budget for the business

To keep the business growing steadily, set up a budget for your business to prevent it from draining more money out of you. This is especially when you have another source of income such as full-time employment with your business being a side hustle. 

This way, you will grow it strictly out of profits and within limits it can manage.

By doing so, you will be able to grow the business without it draining your personal savings or having to take out a loan to keep it going. 

5. Understand the Pitfalls of Family and Business

To successfully run a business, ensure your family/partner understands how it all works. Family needs to understand how much revenue comes out of the investment, and how much they can afford to spend while still remaining profitable, and saving in the process.

While it is of absolute necessity to involve your spouse and children in the family business, you should not let family needs come in the way of business success. This could be from staffing to day to day decisions and sharing of revenue.

Family needs have to be secondary to business needs if the business is to stand the test of time.

Read Also: 8 Common Challenges Every Family-Owned Business Faces (and how to overcome)

6. Understand what is a business expense and what isn’t

As you operate your business, you should clearly know what qualifies to be billed to the business and what is not.

For instance, if you were out running personal errands and took lunch on the business’ bill, that is misplaced expenditure. Take that out of your personal finances. 

The business should be able to only fund activities related to its general growth and profitability.

Lunch out with your friends and family does not qualify as a business expense, if you won’t pay it out of your (personal) pocket, then you just can’t afford it.

Read Also: 7 Things to Know Before Starting a Business With Your Family

7. Keep logs of shared expenditures

For every time you use something personal for the business or vice versa, keep logs so as to balance the finances, and account for the income and expenses.

Shared expenses may include airtime, taking out a business partner or prospective client for lunch, and using your personal vehicle for business errands, among others. 

You need to keep account of this, so as to be in line with your inventory and finances.

If you take money from the business for personal use, that should be added to the list of business debtors and likewise if you use personal money in the business it should be added to the list of business creditors and strictly treated as such. 

You will not say you made a profit of Ksh30,000 when the Ksh20,000 you used to buy the printer has not been refunded - unless you want to forfeit it to become business capital - but the day-to-day would not involve constant capital injections. 

8. Talk to a professional

Sometimes people need more than their own voice of reason, experience or expertise to take the right action.

If you feel unable to walk this journey alone, seek the help of a professional in finance. You will also most likely actually require a trained accountant to handle your finances including taxes. 

WRAPPING UP

If you are keen on growing your business, whether it is simply a side hustle or a fully-fledged family business, personal finances must be separated from business operations.

This is not to mean that your business and your personal life are not intertwined. Nevertheless, if the business is to grow, it has to have its own records, own assets and liabilities as an independent entity that transacts on its own. 

It is very ordering, can generally help you get better financing terms and will save you from a possibility of business failure that can be occasioned by personal interests coming in the way of business needs. 

If you look around, there is no shortage of tales of businesses, even some at hundreds of millions of shillings, failing primarily because of personal interests.

You do not want yours to be that story.