Here's why keeping business and personal finances separate benefits your company
It is never advisable to mix your business finances with your personal finances. No matter how small or casual your nature and size of the business is, it should always be treated as a separate viable entity. You will never be able to ascertain the cost of doing business if you don’t keep it separate from personal income and expenses. Your business also needs to be distinct as it is subject to different statutory and tax compliances.
There are specifics steps that you can take to separate your business from your personal affairs and keep it that way.
- Separate business entity
Entities like partnerships and companies have a separate legal identity and it is easier to maintain the separation. In case of proprietorship, the owner can register the name of the entity and use it for all commercial dealings. If all business incomes and receipts come in the name of the proprietorship, it is easier to have a separate record of the business.
- A separate bank account
You probably already have a personal bank account. Once you set up your business, it is essential that you open a separate bank account too. The separate name, trade license and other registrations and permits will help you to open a bank account in the name of the business. There are several other advantages of a Current Account. You can funnel all your business transactions through this account, and keep business and personal finance separate.
Business transactions are easier using a Current Account as compared to the Savings Account. With HDFC Bank Current Account you get to select from 19 different Current Account products, with latest facilities. Some of these are: 24-hour phone banking, mobile banking, net banking, mobile alerts, services like inward remittances, overdraft facilities, multi-location deposits and withdrawals, periodic statements, personal relationship manager, etc. Having a Current Account and associating with a bank brings in professionalism into your business acquaintances and enhances your creditworthiness.
- Efficient bookkeeping
To keep business and personal expenses separate, you should know the difference between the two. This also goes for your employees, particularly those involved with accounting. It is useful if you have a bookkeeper who knows the difference between the two and accounts for the same correctly. If you used the Business Credit Card to dine with your family, your accountant should know not to enter it under “Staff Welfare Expenses” in the books of accounts.
- Tracking shared uses
The more tricky part in this separation is around the bifurcation of shared usages. Are you staying in a rented residence cum office? Are you using personal car for business use, or vice versa? Are you sharing utility bills or Credit Cards? You will have to establish a formalised manner for bifurcation and stick to it fiercely. Your cost accountant or consultant will advise you how to apportion such shared usages.
- Strong documentation
Business-related receipts should be addressed to the business entity while your bills should have your name on them. Documents about receipts and payments should be retained and appropriately filed as they not only help in the bifurcation but are also called upon during tax assessments.
- Limit transactions between a business and personal account
Try to sustain the business within its means instead of loaning money to it from your personal accounts. Similarly, limit withdrawals from the company for personal reasons. A regular and predetermined salary is a much more acceptable form of transaction between the personal Saving Account and business Current Account of a business owner. HDFC Bank Current Account acts as a deposit account with high liquidity options. These allow withdrawal of funds and cheques written against the balance. The number of transactions per day are not limited.
- Compensate yourself
Continuing with the advocacy of treating the business as a separate entity, you deserve to be compensated for the time and effort that you put into your business. As such, try to determine a salary for yourself that your company ought to pay you for your services. This will define the extent of financial exchanges between you and your business and set some discipline into internal financial dealings.
By following these simple techniques, you can successfully manage to keep your financial transactions out of your business books and make it easy for yourself to adjudge your business performance, fulfill the tax and other obligations and have better control over your business information.
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