Like oil and water, your business and personal finances don’t mix. Responsible financial management is crucial to surviving a volatile economy for any company. To keep stable finances, business owners need to be well versed in financial literacy, in their personal and professional lives.

The startup and growth phase

It’s easy to overstretch personal finances to support the startup costs of a business. Trying to compensate for the lack of revenues leads to mismanaging personal finances. Not saving, and borrowing against personal credit, are partly why 30 percent of small businesses fail in their first year.

When your business begins to generate cash flow, the business then supports you. It’s crucial to budget personal and business expenses separately or both will suffer during challenges of downturns in fluctuating markets. The ability to protect your personal assets from business debts and losses should be of the utmost importance for any business owner.

Establish a business credit profile

Putting your business on the map is the first step to separating your finances. As a business owner, you need to apply for an employer identification number (EIN) via the IRS website. The EIN is for tax and credit purposes. Obtaining one allows your business to build a credit profile and maintain a record of business transactions. Until you file your business as a separate legal entity, you are personally liable for all financial business activities.

The advantage to having an established business credit profile is increased borrowing power. Reports show 29 percent of small businesses fail because they run out of money. A strong business credit profile lets you qualify for small business loans with low interest rates, creating the ability to have access to cash without tying up your own working capital.

Finding the balance

So, where do you go from here? Once you’ve legally separated your personal finances from your business expenses, it’s time to open separate accounts. Out of the 65 percent of business owners who use credit cards for business expenses, only 50 percent of the cards are under the small business’ name. Having a business credit card, and using it responsibly, sends positive credit activity to business credit bureaus, and legitimizes your business.

Opening a business credit card is an easy way to draw a clear line between business and personal transactions. Keeping business receipts can be a hassle. Whether you’re buying inventory, advertising, or going to a networking convention for your company, using a small business credit card is a simple way to document these expenses, without much effort.

Business bank accounts

Once your business is ready to start accepting or spending money a business bank account needs to be opened. A checking, savings, and merchant services account are typical business accounts to have. The merchant services account allows you to accept credit and debit card transactions from customers.

Business accounts afford business owners perks standard personal accounts don’t offer. For example:

  • Protection. Business bank accounts offer purchase protection for your customers and ensures that their personal information is secure, while personal accounts offer limited liability protection.
  • Professionalism. According to the IRS, only businesses can deduct business expenses. If the expenses incurred for your business are deducted from your personal bank account, the IRS will have the impression your business is a hobby. If you were to be audited, you will have a difficult time proving your business’ validity.
  • Relationships. As your business grows, having a good relationship with your bank will become increasingly important. The sooner you open the account, the sooner you begin establishing a relationship with the bank, which makes obtaining finances for future business expenses easier.

Managing personal finances

As a business owner, it is easy to lose sight of your personal finances in the day-to-day responsibilities of running a business. However, like a business, your bottom line for your personal finances should be attended to and defined. Are you putting money towards your retirement? Are you adding to your savings with each paycheck? Have you cut out expenses that aren’t adding value to your life? Do you have adequate health or life insurance?

While it seems like a basic concept, many people lose sight of maintaining a positive cash flow, and preparing for the future. Always spend less than you make. Remember some months will be better than others. When revenue doubles or triples create a flexible account after you:

  1. Pay taxes
  2. Put away for retirement
  3. Set aside for an emergency fund
  4. Pay yourself a salary

Tools to help

It can seem daunting to balance two budgets while managing your business and personal life. A great way to begin getting your finances in order is to make a spreadsheet. Monitor and track your cashflow like you would for your business. This will make it easier to see where you need to cut back, what bills need to be paid, and whether or not you’re spending your money wisely.

If you regularly use personal items, such as your car or phone for business needs, keep track of how much the use costs you. For example, logging gas used on business trips and monitoring your business calls on your personal phone will allow you to claim those activities at the end of the year. Too often, business owners assume responsibility for costs that can easily be written off.

There are many tools available for personal financial management to make things easier if spreadsheets seem too time consuming

  • Mint. A popular free tool helps track expenses, plan your budget, and sends alerts when you’re close to reaching your limit for spending.
  • Shoeboxed. A fast way to digitize and archive receipts in a single, secure location. Turn receipts into verified data, categorized, organized, and searchable anytime, anywhere.
  • SavedPlus. This app is good for people who have trouble saving. It lets you set aside a percentage of each purchase you make. The percentage is then sent into your savings account with a weekly deposit.
  • Level Money. This is a great app that helps you gauge how much money you have to spend each month based on your income level.

Final thoughts

Of course, every business is unique and as a business owner, you should always tailor your focus and budget to what’s right in your situation. Planning ahead and remaining frugal will serve you and your business well in the long run. This provides a clear roadmap to achieving your business and personal goals.

You might like: The Ultimate Receipt Organization & Management Resource

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