Small business owners, Sole prop’s and other self-employed people easily fall into the trap of tangling their business and personal finances.
Not only does this expose the business to several risks, it also creates a bookkeeping problem by failing to account for business expenses adequately.
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 financial records are accurate and to get a clear view of how the business is performing.
The risks associated with commingling funds:
1. 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.
If certain transactions are not reflected in the business account, the bank won’t have a complete understanding of the business, which may be detrimental to the credit application.
Be cautious against borrowing funds from a 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
2. Tax
Tax filing 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.
3. 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.
4. 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 business owner to follow.