Mixing Funds Can Make A Sour Cocktail

By Administrator | May 2, 2016

If you’ve read even one “Bookkeeping For Small Business” article or blog post you know that the one of the first pieces of advice is to keep your personal and business funds separate. Yes, this can be easier said than done, but it is essential for running a successful and profitable business.

But this isn’t the mixing of funds I want to talk about today. I want to talk about mixing the business funds you spend that are cash and credit. Mixing these funds can make tax time extremely difficult, time consuming and expensive…both in lost deductions and tax preparation fees.

You need to keep a separate ledger for each business account with a unique account number. What I mean is you need a ledger for your business checking account, your business savings account, the business credit card (one for each), and any loans or lines of credit you have for the business.

Now, I know I used an accounting term above, I used “ledger”, don’t panic. It is not as complicated as you might think, especially if you are using QuickBooks or QuickBooks Online. But even if you are using Excel or just a pen and paper it is still ok, most non-accountants will more likely think Register or Account than Ledger. Let me show you what I mean…

In this image, each account is unique in the Chart of Accounts, has its own register and is reconciled individually on a monthly basis. Only transactions that hit that account are recorded in that ledger/register. So when you look at Business Checking and see $50.00 to Staples you know that money came out of the bank account. Or when you look at Credit Card (1) and see $30.00 to Circle K, you know that was paid with a credit card and is added to the balance owed. There is no mixing of funds.

So, WHY do I have to do you this, you are probably asking. Well for a few of reasons.

  1. So you know how much money you have. It is important for running a successful business that you know your cash position, how much money you truly have in the bank. I’ve met many business owners who rely on their online bank balance, instead of actually keeping track and knowing how much money they have, what is outstanding, and what needs to be paid. And, sadly, I’ve seen many run into difficulty making payroll, paying outstanding bills or debts, or just being able to take needed funds as a salary, because they forgot to account for outstanding items. And if you have transactions paid by other means included it can just compound the problems.
  2. So you know how much money you owe. Not only are you muddying the waters by posting your credit card purchases to your bank account, it makes it harder to know how much you owe and how much the debt is costing you. Those are the obvious issues, but if we go even deeper than that…it can make it difficult to get a repayment plan in place. It will also be extremely difficult to get financing for almost anything if you present a financial institution with records that have these funds mixed, which means you may not be able to expand your business or replace equipment.
  3. It will SAVE you money. First, if your books are balanced and funds are accurately posted to the correct accounts, you will make your tax preparer’s life so much easier. And the easier it is for them the less it will cost you. Second, if you are looking to finance new equipment, or get a loan to fund growth, or even to try and restructure an existing loan, the better shape your books are in the better your interest rate might be, again saving you money in the long run. Third, you can avoid some bank fees. Remember in knowing how much money you have, I talked about difficulty in making payroll or paying bills when due…well by knowing exactly how much money you have and how much you owe, you can avoid late payment fees, non-sufficient funds fees, as well as additional interest charges on the money you owe.

Keeping your funds separate, personal and business as well as within the business accounting can help you make better decisions, help you feel more confident about where your business is going and help make next year’s tax time that much smoother for you.

A professional and experienced bookkeeper will be able to help you separate your mixed funds and give you ideas on how to live off your small business or entrepreneurial income, without souring your bookkeeping cocktail.

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