When funds are scarce and liabilities are due, some business owners may be tempted to combine business and personal financial obligations. However dire the circumstances, using company funds to pay personal debt and expenses or vice versa is ill-advised.
Among the transgressions that could potentially wreak havoc on your company’s financial statements are the following transactions:
- The deposit of business checks into a personal account.
- The transfer of funds between business and personal accounts.
- The disbursement of business checks to pay personal credit cards and personal expenses.
- The use of a company credit card for personal purchases.
Of the many nightmares misuse of cash creates is the confusion to be had when filing tax returns. Explaining to the IRS the differentiation between business and personal transactions when merging them is a headache you don’t need.
Commingling funds discredits the financial profile of your company. The statement of cash flows is skewed. The balance sheet is inaccurate and discrepancies surface on the profit and loss statement. The result being inaccurate tax liabilities and a bogus bottom line.
Preventing the aforementioned scenarios is simple.
- Have a buffer. A minimum savings of six months of expenses will suffice and continue adding to it. Keep separate savings accounts for your personal and business expenses.
- Create a budget and stick to it. Both a business and a personal budget will keep you on track and prevent overspending.
- Limit credit card debt and pay off balances within a short period of time.
- Deposit business checks into your business account and pay yourself. This allows disbursement of funds from the appropriate sources of income.
Remember that commingling complicates your bookkeeping and jeopardizes the progress of your business. Business income is used to support business operations which includes your paycheck.
Abiding by this simple rule of keeping distance between your business and personal financial obligations will help ensure the stability and success of your small business.