Does checking the net income of your business involve sifting through Uber receipts, restaurant bills, Venmo payments, stock investments, and a myriad of other personal finances?
The most organized among us might track their business finances separately on Excel. But if you’re like most modern freelancers, your income, business expenses, and personal spending are probably commingled on a single monthly bank statement.
As a business owner, having the ability to quickly view your company’s financial status at any time is essential. Unless you keep your business and personal finances separate, untangling them accurately can become a resource-intensive and time-consuming project — not to mention a major headache.
Many freelancers don’t feel a strong need to separate their business and personal finances. After all, at the end of the day, all of that money is going to and from you, right?
Maybe that was a sufficient reason when you were just starting off, but for a growing professional company, this approach can create many problems down the line.
Completely separating your business and personal finances not only helps you gain more clarity into the financial state of your business, but it can also become critical to proving your financial credibility in the future.
Here are five benefits of separating your business and personal finances:
Separating your business and personal finances allows you to more easily track your business expenses, which you’ll want to know when tax season rolls around. With more tax-deductible expenses accounted for, you can ultimately reduce what you owe or get more of a refund.
Having clarity into your income is of obvious importance. But beyond seeing how much you’ve earned from each client, you’ll likely want to see how your total income is growing over time. Gaining clarity into your income growth across both active and passive money streams can help inform important decisions regarding your rates, the volume of your work, and hiring employees.
If you don’t separate your business income from your personal income (for example, personal investments or monetary gifts), you could end up with an inflated view of your company’s financial performance.
Why create more work for yourself? The task of manually sorting business expenses from personal expenses at the end of each month or year is an arduous and error-prone task. Not to mention, it can consume tons of valuable time that could be spent earning more money.
By monitoring your personal and business finances separately, you’ll be able to easily track business expenses so you can understand the true operating cost of running your company.
With an accurate picture of your business expenses and income, you can more effectively gauge how much you can afford to spend or invest. Separating your finances gives you the clarity required to plan for both business and personal needs on the go.
If you want to grow your company, you will likely need to obtain more working capital at some point down the road. If you want to borrow money in the name of your business, you’ll need to prove that your business is prosperous without the help of your personal finances. If your business and personal finances are commingled in the same account, the bank will likely require you to personally guarantee the loan, which means you’ll be responsible for any debt if your company defaults.
Now that we’ve covered some of the main reasons to separate your personal and business finances, you’re probably thinking, Where do I start?
The task of retroactively separating all of your expenses and income can seem like a major project, but with Lance, it will take all of three minutes.
Lance takes the manual work out of your hands by automatically separating your finances and tracking all future changes to your accounts. The app is designed specifically for freelancers, so we understand exactly how you got to this commingled state.
Separating your business and personal finances into different accounts is the ideal solution for solopreneurs, but the actual benefit of that is having real-time clarity into the state of each. Even if all of your business and personal money comes and goes from the same account, it doesn’t matter with Lance. The app automatically does the sorting work for you, presents all of the information in intuitive and easy-to-manage views, and even offers a notes section so you can record additional information.
If you need to sort through every credit card charge, birthday check, and other miscellaneous finances in order to understand the true cost of maintaining your business, I can tell you there’s a much better way of doing things.
By taking proactive measures to separate your finances, you’ll gain the clarity and confidence necessary to make informed business decisions and steer your company down the path of success.