Paying Expenses/Making Multiple Personalities Work for You
When you own a business everyone’s got their hands out for some of your money. Whether it’s employees, suppliers, the government or even customers – you’re paying bills and paying people left-right, and center. But it’s not just business – you have a family and friends and the sports club and the girl's night out – many things that require you to make payments. Sometimes it can be a challenge to keep it all straight. In fact – it really is like having multiple personalities with you that sometimes all try to come out together,
Here’s how it usually goes: You go down to the supermarket to get the family groceries. You remember that you need milk, biscuits, paper towels, and coffee for the office – so you throw them in the trolley and pay for it all on your personal credit card. On your way out you fill up the family car, but pay for it from the business cheque account (because you worry that with the rising price of food and fuel your personal credit card is probably close to being maxed out). On the weekend you take the kids out to McDonald's. After you order you try to pay by INTERACT but it is declined, so you use the business card because you know there is money there – after all, it’s all your money, right!?
At the end of the year sorting out what is personal and what is business can be a real nightmare, and you just end up paying your accountant more to do what you should have got right in the first place. And will you ever remember to claim those morning tea supplies that were part of your family shopping trip? Maybe not.
Multiple Personality Disorder is usually seen as a bad thing (and if the voices in your head tell you otherwise then you need to see a different kind of professional). But when you are in business it can be a very useful thing.
Keeping your business world separate from your personal world can make your accounting so much easier. This is especially important for Sole Traders for whom there is no legal separation between their business and themselves, but also just as important for a Managing Director of a family-owned company.
Here are a few tips that will help you keep your Multiple Personalities in line when it comes to your accounting:
1. Keep separate bank accounts for business and personal transactions
The first is to keep separate bank accounts. Now this may seem pretty straight forward but I can’t tell you how often this is overlooked – especially for Sole Traders. But the starting point of good hygiene is to keep your business funds separate from your personal funds. Now this doesn’t mean that you can’t transfer between them, but it makes your accounting life so much simpler if all your business transactions are in one place. It’s quite OK to sweep out the money from the business account and then put money back if you need to pay bills, but the objective is to have a one place where you initiate all your business tranactions and having that separate from your personal transactions.
I go as far as also recommending that you keep a separate credit card for business use to avoid the chance that you buy something on credit and forget to record it in the accounts. I have several businesses and I have a separate credit card for each of the two main ones. I have a different PIN on these that I have on my personal account – just a further mental process that helps me make sure that I’m using the right card. The cards don’t have to be in the company name – mine are in my personal name. You just have to try to keep the personal transactions on the personal card and the business transactions on the business card.
If you’re using Xero then the bank feeds help keep you up to date. Most banks offer a small business package with fixed fees of around $15 a month.
2. Bank all business income directly into your business account
Always (and I mean always) bank business proceeds into the business account. Diverting money into your personal account is inviting an accusation of tax fraud.
Now, this should go without saying but is so often broken. If you’re a sole trader then this is even more difficult. So if you receive cash then you should bank all the cash, if possible – straight into your business account.
3. Avoid paying personal expenses from your business account
This is not always possible – my wife went to the supermarket last week and I had her personal credit card in my pocket so she had no choice but to use the business card. But it is a rare event and I quickly spotted it two days later when it showed up in my Xero bank feed and I didn’t recognize it and I could check with her while it was still fresh in her mind.
If you do have personal expenses going through your business account then you should make sure that you code them correctly (honestly) in your ledger. If you are going to transfer money into the business account from your personal account to cover it then you could code both the spend and the payment into Suspense so that they offset, or you could code the spend to Drawings and the cash into Funds Introduced.