Every small business owner knows the importance of separating personal and business funds. However, making clear divisions seem impractical at times. You as a person and as a worker of your business is just one individual. When you go out to buy office supplies, it makes sense to drop by the grocery store beside it. Separate runs for each incur unnecessary time and fuel expense.
The confusion starts when such exemptions are frequently done. Using a personal cheque book by accident when paying a vendor makes you look unprofessional. It’s a dead giveaway that you are a small company, taking away leverage in negotiations. Below are some areas you can work on to clear things up.
Separate bank accounts
Having separate bank accounts for your personal and business finances is basic. Open the business account upon receipt of the ABN. Put the initial investment and source here all business-related expenses moving forward.
There are times that the business will be short of cash. It’s cheaper to fill the gap with your idle personal money than source it from a loan. Go ahead and transfer the needed amount from your personal to the business account. Tag the transaction as ‘owner’s equity’. When the amount is returned, tag it as ‘owner’s draw’. You can also label it as a loan then repay the amount with interest, similar to how you pay a financial institution.
Keeping a clean log of expenses
Avoid paying cash for your business. You may lose the receipt before you can record the transaction in your books. Credit cards or checks will have electronic records that you can review whenever you need to. Plus it avoids the hassle of segregating the cash in your wallet.
Make a reasonable split of petrol expenses for trips that combine personal and business goals. The same goes for other payments made that served both.
Prepare the company cheque before meeting the supplier to pay for your purchases. Mistakes happen and you’ve paid with cash. Don’t miss out on potential tax deductions. Scan the receipt or take a picture for audit purposes.
Give yourself a salary
See yourself as an employee. Determine a reasonable salary that’s good for you and the business. Feel free to give ‘sales commission’ when earned. It should be periodic and given only after certain metrics are met.
Ideally, your business address is different from your home address. But you want to preserve cash to fund equipment purchases. The solution — be your own landlord and collect rent from the business. The positives:
- Negotiation for long-term leases are easy
- More income for you from your business on top salary
- Cheaper and faster commute to work
- Rent expenses are already included in your OPEX. Easier to budget when the company is big enough to move out
- You can claim rent as tax deduction
Of course, you can only do this if you have a spare room in your house. Don’t forget the paperwork of the lease.
There’s one downside. If you wish to sell your home, you’re only getting partial ‘main residence exemption’ on capital gains tax. Get a valuation for your home before setting up the business. This will help in computing the capital gain or loss when the house is sold.
Prepare a budget
If you have a business plan, great. If there’s none yet, at least prepare a budget. This will help you plan financially. How much initial investment is needed? How much and how frequent will you need to source from your personal fund in worse case scenarios? If you feel you are not ready to make financial forecasts yet, check with a consultant on business financial modelling. This may help determine what’s the viable salary and rent you will receive. With the correct modelling, ‘owner equity’ infusion will be minimised.