Clear the Static: How Mixing Personal and Business Finances Hides Reality

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Transcript:

A common mistake that small business owners make is adding personal expenses to their books. I'll explain what to do about this today on Your Money and Your Business.

Hello, my fellow entrepreneur friend. I'm Jonathan Ankney, the Small Business CFO. Yesterday, I met with a small business owner whose books were all messed up because of how he was handling his personal expenses in his QuickBooks.

It is a problem, but it’s one that can be easily corrected.

First, why is it a problem?

In order to have complete clarity on how your business is doing, we want to make sure that all non-business expenses are kept out of the business’s financials.

The moment we start adding lines for personal expenses and mixing those numbers in, it creates more noise—more mental static that we have to eliminate in order to understand how the business is truly performing.

I compare it to being in a noisy restaurant where you're trying to talk to your friends. There's so much background noise that it takes more mental effort just to communicate.

The same thing happens visually when you look at business financials cluttered with personal information. We want to keep personal finances entirely off the business’s financials.

Second, from the government's perspective, you and your business are two separate people. You have separate tax IDs. I even think of it this way: my business is a separate person, and if I take money from the business or spend money on its behalf, then either I owe the business money, or the business owes me money.

So what should you do?

You should have a credit card for business use and a different one for personal use.

If you're just starting out, you might have trouble getting a business credit card because your business doesn't yet have a credit score. That’s okay. Just apply for another credit card in your personal name—but use it only for business purposes.

That’s what I did years ago with an American Express card. I got one in my name, used it exclusively for business, and recorded it on my books.

Now, if you accidentally use the business card for a personal purchase, you still need to track the outlay in your books—but not as an expense. Let me clarify: the transaction needs to be tracked, but it doesn’t count as a business expense. Instead, you add a balance sheet account labeled something like Personal Expenses – Due from Owner.

That way, you can remember that you spent the money using the company card and owe it back to the business. You can reimburse the business later on.

Conversely, if you use personal money for business purposes, submit an expense report and cut yourself a check.

If you want to keep your personal books—which I highly recommend—I suggest using either the Wave accounting app (which has a similar look and feel to QuickBooks) or Mint. Mint felt a little light to me the last time I used it, but it may have added new features since then. I’ll include links to both in the comments.

That’s it. Very intuitive. Just remember: you and the business are different people. Each has its own bank accounts. Each has its own credit card accounts. If one spends money on behalf of the other, it's an IOU.

That's pretty much it. If you have questions, drop me a line.

I'll see you next time here on Your Money and Your Business.

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