Gotta Keep Um Separated
Hey ladies who run small businesses, let's talk about something that may not sound super exciting at first but is essential for your financial success— the “economic entity assumption”. Boring right? It is sooooo important and this is something that I am seeing so many of my entrepreneur babe clients getting very wrong, and it has definite conseqences.
What is this economic entity assumption, you ask? Well, it's a fancy accounting concept that basically says you should keep your personal and business transactions separate. In simpler terms, it means you should avoid mixing your personal and business finances. Let's dive into why this is so important.
Clarity is Key: By maintaining separate accounts and records for your personal and business transactions, you create a clear distinction between the two. This separation helps you keep track of your business income, expenses, and profitability accurately. A lot of the women I work with aren’t really sure how much to pay themselves from their business, or when to pay themselves. Mixing personal and business transactions together in the same count makes this all really muddy and the biggest consequences are really emotional - it is frustrating and confusing to run a business this way. When tax season rolls around or you need to analyze your business's financial health, having clean and organized records will also save you from headaches and potential mistakes.
Legal Protection: Separating your personal and business transactions can offer legal protection. If your business faces any legal issues or debts, maintaining a clear separation can shield your personal assets from being at risk. It helps establish your business as a distinct entity, making it easier to protect your personal finances and limit liability.
Financial Planning and Growth: Separating personal and business finances is crucial for effective financial planning. It allows you to evaluate your business's financial health accurately, identify areas of growth or improvement, and set realistic goals. Additionally, if you plan to seek funding or apply for business loans, having clean and well-organized business financials will increase your chances of success.
Tax Compliance: As we mentioned earlier, separating personal and business transactions can be a lifesaver during tax season. By having dedicated business accounts and records, you can easily identify deductible business expenses, claim relevant tax credits, and minimize the chances of triggering an audit. Keeping things separate ensures you're in compliance with tax regulations, avoiding potential penalties and complications.
Now that we've discussed why it's important to keep personal and business transactions separate, how can you implement this in practice?
Start by opening a separate business bank account. Seriously - if you are running a business and you haven’t done this yet, STOP and find a time you can do this THIS WEEK. Use it exclusively for your business income and expenses. Similarly, maintain separate credit cards, accounting software, and financial records for your personal and business finances. This clear demarcation will simplify bookkeeping and financial management.
Remember, keeping personal and business transactions separate isn't just about numbers; it's a mindset shift that improves financial clarity, and safeguards your personal assets.
So, ladies, let's commit to separating our personal and business finances. It's a small step that can make a world of difference in our financial success and peace of mind.
Disclaimer: The information provided in this article is for general informational purposes only and should not be considered as professional financial or legal advice. Please consult with a qualified professional for specific advice tailored to your individual circumstances.