True or False: I don’t need to separate my business bank account and personal account. I can run my personal expenses out of my business account if I want to.
True. You can.
But you can also use your knuckles to hammer in a nail. It’s not necessarily a good idea.
One of the most common issues we come across with small business owners is mixing their personal banking with their business banking. Using your business account to buy groceries, pay for holidays, rent on your home, entertainment etc can have serious consequences.
In the end it costs you more money.
3 quick reasons why it’s a bad idea
Here are 3 reasons why it’s a bad idea not to separate your business bank account and personal account.
1. It drains the cash flow in your business
When the time comes for BAS payments (this includes GST and PAYG if you employ staff), staff superannuation payments, paying creditors and other larger monthly expenses, a lot of small business owners who use their business bank account for personal expenses, face this problem.
They simply don’t have the cash available and end up with a large ATO debt.
2. It makes it more difficult to work out how your business is running
With a separate business bank account you have a cleaner view of how your business’ finances are looking. You can get a better sense of whether your business is profitable. It’s easier to monitor whether payments are going out correctly and on time and very importantly for small business, whether invoices are being paid on time.
3. It increases your bookkeeping/accounting costs
If you’re only using one bank account for both personal and business activities it will end up costing you more in bookkeeping fees as additional entries have to be processed. It also takes more time for your accountant to sift through all the activity on your bank statement.
An easy solution
The solution: Determine a set amount each week/fortnight/month to pay yourself as a wage and transfer that amount into your personal bank account.
Keep your business bank account activity purely restricted to business. If you are a sole proprietor or operating through a trust, we suggest taking around 30% of your wage and putting this in a separate account (if you have a home loan, an offset account is ideal) to cover your income tax payments.
For clients who are not too financially disciplined, we also recommend opening up a separate business account into which you should transfer weekly the GST you have received as well as the PAYG deducted from staff wages. When the time comes to pay the BAS you have these funds available.
Simple little steps that can make the difference between success and failure.
If you’d like to chat more about this with us, get in touch via our contact page.