Here’s How Not To Be “Penny Wise and Pound Foolish”

Here’s one of the most common money mistakes I see you, the newbie business owner, make:  you commingle your business AND personal funds in one checking account (usually your personal account).

 

Why this is a bad idea.

1.     It’s time consuming to separate out the business from the personal because it opens up an unnecessary avenue for data-entry error.  Instead of designing the separation up front and automatically funneling business expenses only to the business account and personal expenses only to the personal account, you have to think about what’s business and what’s personal every month and manually separate the two.  The data-entry error comes in when you misapply one to the other.  

2.     It makes you look less-than-legitimate in the eyes of the IRS.  First off, should you get audited for your personal taxes, the IRS now has access to your business as well.  Give the IRS what it asks for and not an iota of information more.   Second off, you just don’t seem like a serious business. 

3.     It also puts you at a disadvantage with vendors, who take you at your own valuation.  If you don’t take you and your business seriously, why should they? 

4.     And your money gets confused.  I know I’m getting a little woo-woo here.  But really, money is energy and your money needs to know where to go.  It needs a container, a separate business account that lets your business income know where it lives.

5.     Commingling also gives you a false picture of how much cash you really have in your checking account.  Say you have a total of $8,000 in the account.  $3,500 is business money and $4,500 is personal money.  And say you have a business bill that comes in for $5,500.  While you have the actual cash in the account to pay that bill, the business doesn’t have that money.  Commingling makes it hard to see the cash flow status of your business.

6.   And here’s the last thing:  If your business has a name and clients write a check using your business name, most banks will not accept that check for deposit into a personal account.  This just keeps you playing small.

 

Why you may think you’re doing the right thing (but you’re really not):

1.     To save the cost of bank fees and checks.

2.     To save the time involved in setting up the account.

3.     To save the time involved in reconciling another account.

 

 

 

Best Practice: Open a separate checking account for your business. 

Have you opened your business account yet?  Would love to know if you felt any differently about yourself and your business after.  More grown up?  More official?  More legit?  Please leave a comment below!