While getting paid may be the highlight of your day, managing your money and expenses is likely the less fun chore. Avoid your instinct to lean on your personal money-management skills.
Let’s take a look at 4 top situations when your personal and business finances should be handled differently.
Budgeting for Unexpected Costs
Think about how you handle costs, both expected and unexpected. Rent? You’re probably good. Gas? Typically covered. Nail in the tire? That’s going to cost ya. Blown A/C unit? Ouch.
At home: Most individuals have a budget that accounts for obvious, recurring monthly expenses like rent, car payments, groceries, and more. And even if they don’t refer to the budget every month, that’s loosely how they ensure they have enough cash in the bank to cover these items each month. When unexpected expenses pop up, they get covered out of either a budgeted “incidentals” line item (if you’re anal-retentive like me) or out of a rainy-day savings account. For the less prepared, these items often fall to credit cards, loans, or other less-desirable and higher-risk methods of payment.
For your business: For most business situations, costs should be considered either fixed or variable. Much like your regularly budgeted personal expenses, fixed costs have to be paid regardless of your profitability each month. Variable costs, however, are where you should have a little more flexibility.
Prioritizing Cash on Hand
At home: The latest trend in personal financing is all about being debt-free. Finance gurus preach various methods for debt consolidation and how to pay down your debt fast.
For your business: But in the business world, debt and cash hold different levels of importance. Many business owners will agree that having cash on hand is critical, maybe even more important than being totally debt-free. Without cash on hand to keep the business afloat during slow times, your business could find itself in a bind.
Like saving money, there are multiple ways to increase cash on hand.
- Incentivize customers to pay immediately, either with a discount or bonus service.
- Develop a rewards program to encourage repeat business.
- Watch refunds carefully, and have a stringent process in place for how and when you approve them.
- Look into credit options for customers who struggle to pay on time or can’t pay in full.
I’m not afraid to say it…taxes are a pain. And when you run a local business, you know that pain all too well. That said, handling them for your personal finances and for your business are two different animals. Sometimes they intersect, based on how you’ve set up your business’s finances.
At home: As of last year, nearly half of Americans filed taxes from the comfort of their homes. Of those respondents, the majority do so via a digital tax-prep tool like TurboTax.
For your business: When it comes to your business, there are countless additional traps you could fall into when preparing your taxes each year. To keep yourself out of trouble, consider hiring an expert. Qualified accountants and tax preparers can help you navigate the confusing tax codes and will help you stay in compliance and out of trouble. They can even help you better prepare for the upcoming tax seasons, with guidance on file-keeping, payroll, and more. Do your research, and make sure you hire someone you trust!
At home: If you own your own local business, it can be tempting to run it out of bank accounts you already use in your personal life. Heck, if you’re the sole partner and owner, why not streamline your banking in this way? Right?
For your business: Almost every expert in this area recommends keeping personal and business finances separate. Aside from making tax season easier on both you and your accountant, there are several reasons to avoid mixing business with pleasure when it comes to your finances.
- You’ll be better able to avoid getting into situations involving fraud or embezzlement. This is usually a big business topic, but better safe than sorry when it comes to your livelihood.
- Having a line of credit specific to your business helps you better keep track of how much you’re spending. It also makes it a lot easier to tally up what you can use as a tax write-off later in the year.
- Having a savings account that’s only accessible for your business will also help you prioritize investing in your own growth. For example, consider taking a percentage of each sale and contributing that to savings.
- Keeping finances separate should also keep you from dipping into your personal finances when times get tough at work, no matter how tempting it may be to do so.