One of the many things business schools will teach you first is to separate personal finances from business funds. The strategy is crucial to avoid business financial management complications while ensuring that your survival will never be under threat. However, it is not an exact science. The lines will blur, even if you have two separate accounts for each of them. Running a business and surviving might feel like two different tasks, but they are both happening to you.
Unfortunately, mixing personal finances with your business could dramatically impact operations. The situation can get even more disruptive if you make mistakes. Your finances should always be positive to prevent your business from suffering. However, it doesn’t mean that everything will be okay when your business struggles.
Should those two financial situations cross paths, you must be ready to deal with these potential complications:
Business owners do not budget their business funds the same way they do their personal finances. Personal stuff like rent, groceries, shopping needs, and utilities have fixed and unfixed variables. As a result, the best a person can do with personal budgeting is to make monthly estimates. If they do not have enough money to pay for one expense, another category must give way. That flexibility will not happen in business funds, which budgets down to the very last cent.
Your business budget is often an indicator of growth and success. Financial metrics allow you to check your efficiency and productivity, allowing your company to maintain a strong performance. However, there might be so many business divisions and tasks that require their respective funding, making it challenging to track everything you need to keep the books clean and productive.
Business audits are legal requirements, ensuring that nobody commits fraud and your company does not escape government laws. Mixing your personal budget into the mix could lead to higher taxes, numerous adjustments, and missed accounting, creating headaches for your finance team.
Business taxes are some of the most complicated parts of the bookkeeping process. You will have to take note ever of every single dollar you spend to ensure that you know your tax category. Adding your personal bank account to the mix can create challenges. Your tax issues might end up usurping your properties, getting high penalties, or getting forced into bankruptcy.
Unfortunately, all your research might not help you understand how taxes work when your business and personal funds get mixed. As a result, you might have trouble filing taxes correctly, leading to unintentional tax fraud. Fortunately, you can hire a professional accountant to help you with your task.
Unfortunately, personal finances can affect your credit scores. You might be looking for real estate properties to call your new home, leading you to mortgage loans. Some business owners want to get a new car, which forces them to get auto loans. The business might be struggling, making it necessary to take out a small business loan from banks. Unfortunately, all those things add to the debt, which your company will suffer from when applying for loans.
Lenders might take one look at your credit score and refuse to provide you with a business loan. If they do, lenders might opt for a higher interest rate with collateral should you fail to meet payment terms. Getting a business loan might be necessary for some of your plans. The timing of your personal finances might have to be right to ensure it doesn’t impact your business.
There might be no way of getting out of a mortgage loan, but keeping up with payment terms ensures it won’t impact your credit scores negatively. If you have an existing auto loan, completing payment ahead of the term might be a better option. Preparation will ensure your credit scores are ideal enough to get a budget-friendly business loan. Your company will benefit from personal financial management, especially during the initial stages.
Debt will perhaps be the most disruptive personal finance element that will affect your business. Most companies have suppliers, which is a crucial relationship to keeping the venture afloat. Unfortunately, your personal debt might affect how they interact with you. If your credit score makes you look like a trustworthy person, you might not have an issue with developing a mutually beneficial partnership with your supplier. Should your credit score be on negative waters, you might have to make do with what they have to offer until you can bring the number up.
It can be challenging to separate personal with business funds. However, it is a necessary task to keep everything organized. You might have to do it a few times over your career, especially when the business is struggling. However, you must be ready for these potential issues.