Importance of separating business and personal finances

Self-employed individuals, such as freelancers and tradesman easily fall into the trap of unintentionally mixing business and personal finances.

Not only does this expose the business to several risks, it also creates a bookkeeping problem with the entrepreneur failing to account for business expenses adequately.

Kenneth Matlhole, FNB Business spokesperson, says although it can be quite an inconvenience for sole proprietors to carry two sets of debit and credit cards or switch between bank accounts when transacting, it is a necessary discipline to ensure that the entrepreneur always has accurate financial records and a clear view of how the business is performing.

He unpacks a few risks associated with commingling funds:

Applying for credit – when applying for business credit, the business owner might be required to provide the bank with relevant information, such as banking statements and a cash flow projection as part of the credit assessment process.

The business may be impacted negatively if certain transactions are not reflected in the business account as the bank needs a holistic understanding of the business.

Matlhole also cautions entrepreneurs from the habit of borrowing funds from their business for personal expenses, with the intention of re-funding the account. The situation can easily get out of hand leading to cash flow constraints.

Tax – tax filling can become a challenge, especially if the business is audited and required to provide proof for some of its financial activities, that were performed through a personal account. The business can also lose out on several deductions should it fail to prove that the respective activities were performed by the business.

Cash transactions – not only is it costly for businesses to operate in cash, it also makes it easy for self-employed individuals to mix business and personal finances. Banking through digital channels, such as online and app banking, often proves to be the most effective.

Failure to consult – as the business grows and the owner has less time to manage administration, it may be effective to use the services of professionals, such as accountants. This could ensure that there are strict and consistent finance processes for the entrepreneur to follow.

If you are comfortable in managing the administration yourself, there are a number of online based applications and software available which can assist in tracking revenue and expenses, such as Instant Accounting which is our online accounting solution. Instant Accounting uses your FNB electronic bank statement to generate financial statements and reports, including income statements, balance sheets and cash flow statements.

“It is also important to ensure that you have the right bank account for the type of business you are running to avoid incurring unnecessary banking fees,” concludes Matlhole.

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