Lynda Moore says uncomplicated, clear financial habits can simplify and clarify the way your small business is performing, and prevent some very messy surprises

One of the most common habits I see with business owners is using the business bank account as if it was their personal account.  It isn’t.

This is also how personal spending creep can happen.  You diligently take your weekly drawings from the company bank account and transfer it to your personal account. By the way, well done if you are even doing this step. 

Then it comes to preparing year end accounts, and all the other personal transactions become very visible, particularly when you ask the question, where has the money gone? 

This has been top of mind for me, not just because of the conversations I’m having with my clients about it, but when I looked at my own accounts, I noticed I was doing the same thing. Over the last few months, the number of personal transactions from my business account had crept up.  I hadn’t really noticed it until I was doing my quarterly review of my spending.  I was patting myself on the back for a job well done, until I decided to check my company drawings for the quarter (sorry, I can’t help myself, I’ve been an accountant for far too many years).  Oh dear, I wasn’t doing as well as I thought.  We all know that the cost of living has gone through the roof, but because I was using both business and personal funds, I had lost awareness of just how much that was impacting my costs. 

I do ‘pay’ myself a set amount from my business to my personal account, so in theory, I really shouldn’t be using the business for the little extras.  But many business owners don’t do that, the business account is also the personal account, if money is in the business account it gets spent and at some point, it needs to be untangled. 

It can feel simple. After all, there is only one account to keep track of. 

Until tax time arrives that is, then you realise the nightmare you have created for yourself and your accountant.

Suddenly, you are trying to work out which transactions were business expenses, which were personal, and whether that payment was a business purchase or something you bought for the family. What seemed simple during the year becomes a frustrating mess when you need to understand what your business has really been doing. This can happen even when you use software like Xero or MYOB. It’s very easy to push OK without really looking at each and every transaction. 

And this is the bigger problem. When your personal and business money are mixed together, it becomes much harder to see the financial health of your business and your life. 

Your business is a separate financial entity, even if you are a sole trader.

It needs its own money coming in and going out so you can see what is happening without having to mentally sort through your personal spending at the same time.

A separate business bank account gives you a much clearer picture.

You can see how much the business has earned, what it has spent, what is available to pay suppliers and tax, and whether there is enough cash to support the business.

More importantly, you can start making decisions based on what the business is doing rather than what happens to be sitting in your bank account.

That distinction is important.

Having $10,000 in your bank account does not necessarily mean your business has $10,000 available to spend. Some of that money may belong to the IRD for GST or tax. Some may be needed to pay upcoming bills. And some may simply be personal money that has found its way into the account.

Most business owners do not deliberately make their finances difficult.

The business starts small. There might be only a handful of transactions each week, so using one account seems perfectly reasonable.

Then the business grows.

More customers start paying you. You have more suppliers, subscriptions, equipment purchases and other expenses. Before long, that one bank account is doing the job of both your household and your business. The process of opening more bank accounts and splitting everything can be quite daunting, as well as time consuming and never quite gets to the top of the to do list. 

Some of the most common mistakes include paying personal expenses directly from the business account, using personal cards for business purchases without keeping proper records, transferring money between accounts without recording what the transfer is for, and forgetting to keep receipts.

Another common one is treating every dollar that comes into the business as personal spending money. It’s not. 

Your business may have made a profit, but that doesn't mean all of the cash sitting in the bank belongs to you personally.

And then there is cash flow. If you cannot easily see how much money belongs to the business, it becomes much harder to know whether you can afford to pay a supplier, take on a new expense, employ someone or pay yourself.

Good financial management is not just about knowing how much money you have. It is about knowing what that money is for.

The good news: you can fix it. You do not need a complicated financial system to get started.

Open a separate bank account for your business and use it for business income and expenses. If you have a business credit card, use it for business purchases and keep the personal spending on your personal cards.

Then decide how you will pay yourself.

Rather than taking money whenever you need it, transfer an agreed amount from the business account to your personal account and treat that as your personal money.

And if you have already been mixing everything together, don't panic. Start from where you are.

Talk to your accountant or bookkeeper about cleaning up the existing transactions and putting a simple system in place going forward.

You don't need to become an accountant. You just need to create enough separation that you can see what is happening. Because when your business money and personal money are tangled together, your bank balance tells you very little.

When they are separated, your numbers start to tell you a story.

And that story can help you make better decisions, plan ahead and feel much more in control of your business.

Your business doesn't need more complicated finances. It needs clearer ones.

*Lynda Moore is a Money Mentalist coach and New Zealand’s only certified New Money Story® mentor. Lynda helps you understand why you do the things you do with your money, when we all know we should spend less than we earn. You can contact her here.