Running a Business?

Keep the Money Separate
We are blessed to have a thriving small business community in Western North Carolina. There are many folks scratching their heads over the best way to manage both their personal and business finances and, especially, the sometimes fuzzy area where they intersect. Here are some tips.

First and foremost, keep your personal finances separate from your business finances. I know, part of the appeal of running your own business is the ability to “write off” expenses. This is all well and good, but be sure you school up on what is allowed and what is not. Having a very clear understanding of what constitutes a “business expense” will go a long way to keeping things in good order in case of a personal meeting with the IRS (otherwise known as an audit).

Aside from the legalities of your expenses, the practical reason for keeping things separate is just as important. The experience of counseling numerous clients that run businesses makes one point clear: You need to be able to have a firm grasp on what your personal expenses are, and what your business expenses are.

You might be wondering why that is. So long as all the bills are getting paid, what difference does it make? Planning is the main reason. People tend to underestimate what they actually need to live on in retirement when the personal/business line is fuzzy. Likewise, it is difficult to get a true picture of how the business is doing if you are writing off everything under the sun. This would particularly matter if you were preparing your business for sale. Decide for yourself what is a business expense and then maintain that separation. Besides, tax time is bad enough without the additional stress of having to sort out business and personal expenses!

Start with separate banking arrangements for your personal and business accounts. No, that doesn’t mean separate banks, but they could be, as various banks offer different features and interest rates depending on whether an account is personal or business.

While it might seem ridiculously overcomplicated to reimburse yourself personally for business expenses (and vice versa), I recommend it. Once you have things separate, if you happen to make a transaction that includes both personal and business expenses, keep the receipt and then reimburse one side or another. This way, your records will reflect the transaction correctly, and your financial statements will mirror what your supporting receipts say.

Another way to separate your personal and business financial lives is to use QuickBooks™, or something like it, an accounting software for businesses. If the thought of setting that up gives you hives, pay someone to do it for you. Likely they can give you lessons in how to keep it running after the initial set up. Or take a class! The idea is to end up with an organized way to track expenses and income. Additionally, you will be able to easily produce the types of financial statements needed for acquiring a bank loan or doing some in-depth analysis on the financial status of your business.

Using accounting software has the added benefit of forcing you to have good records. Establishing your chart of accounts for the business will help you remember what receipts are necessary to maintain. Routinely running reports for review and evaluation can also help you make better business decisions. If you are simply rolling along and tossing receipts in a file, you aren’t keeping tabs on business expenses. Sure, you can default to the “do I have money in the bank” methodology, but I would argue that eventually you will screw that up. Always knowing your financial status helps your business stay on track.

As your business grows, this becomes even more important. The “pay as you go” approach gets harder to maintain when you have projects going in multiple directions. It is best to forecast income and expenses to gauge your ability to add a new project, rather than just winging it.

I have been focusing on expenses, but this concept of separation applies to income, too. Income checks to the business should be made out to the business and deposited in the business account. The same principle applies for personal income. How do you pay yourself? You can either set up a payroll service that pays you a regular paycheck, or regularly write a check (or set up an automatic transfer) from the business to yourself. This will help keep your record-keeping square, and help create a more consistent, stable income for yourself.

Income stability in the early years of a business can be a problem. If your business income fluctuates significantly, try to determine an amount you can rely on and make that your stable paycheck. If you need to pay yourself additional amounts at other times, that is fine, just make sure the paper trail is in order. Simply spending all the business income as it comes in is likely to come back and bite you later. Start building a bit of a cushion in the business account so that you are able to maintain your steady paycheck.

Not only does keeping the income you “pay” yourself steady help your records, it also helps you budget. If you know you can count on a small, but stable amount of income to your personal account each month, you can plan your personal budget more thoroughly.

You might be thinking all this only applies to corporations. Well, you would be wrong. Everything I have said here applies to all forms of business. There are some differences in how taxes and liability are handled depending on your form of business, but that is beyond the scope of this discussion. Suffice it to say that many businesses start as sole proprietorships, but, as they grow, the benefits of incorporating may dictate a change in business format. How you think about your income and expenses doesn’t change, or at least it shouldn’t.

Lastly, consider engaging a professional for help. A bookkeeper and/or accountant can be a terrific resource as you are establishing your business “books.” However, that professional can also help you over the years to make sure you stay on track. I have found it invaluable to have help on these matters – so much so that I have paid for bookkeeping and accounting services from the very beginning, even when my business was barely producing income. Having an objective person to evaluate ideas or provide honest feedback about the financial status of your business is priceless.


Dawn Starks is a CERTIFIED FINANCIAL PLANNER™ practitioner and financial advisor at Starks Financial Group (440 Montford Ave. Asheville, NC 28801 (828) 285-8777). Starks Financial Group is not a registered broker/dealer, nor is it affiliated with Raymond James Financial Services. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment Advisory services offered through Raymond James Financial Services Advisors, Inc. This article expresses the opinions of Dawn Starks and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Raymond James Financial Services, Inc. is not affiliated with and does not endorse the services of Quickbooks™. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. You should discuss any tax or legal matters with the appropriate professional. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER ™, and CFP® in the U.S.

Dawn Starks
Written by Dawn Starks