Everyone knows that it’s bad form to mix business and personal expenses. Categorizing those expenses can be very time-consuming come tax season, especially if you’ve been ignoring them all year. But mixing personal and business expenses actually comes with more costs than just tax season headaches.
Billing personal expenses to your business account (or vice-versa) can lead to incorrect assumptions about the financial health of your business. So if you’re struggling to keep them separate even though you know it’s a problem, we are here to help.
In this post, we detail a few key reasons to separate expenses that many business owners overlook, along with some tips for keeping them separate, and how to know when to open a business account if you don’t already have one.
At Pilot, we have a team of expert bookkeepers using unique tools to automate the most error-prone aspects of bookkeeping. If you want to keep better books, Try Pilot Now.
Technically, you can use the same account to fund personal and business expenses. In a pinch, it could be a fast way to cover an expense. And if you are absolutely meticulous about categorizing expenses as business or personal with every single receipt, this system could work for you.
But if you’re not perfect — or your business is growing faster than you imagined — that system breaks down in a hurry. If you’ve used a “spend now, categorize later” approach, the problems could will go well beyond tax season.
Your bookkeeping should reflect the performance of your business.
Let’s say you have a lot of meals coming out of a business account. That could make it look like you’re spending money on meetings with clients and growing your business. But if these meals are actually personal expenses, you could be getting an incorrect picture of what’s going on in your business.
Missing or inaccurate information can lead you to underestimate or overestimate your burn rate, overspend, misallocate funding, or otherwise make unwise financial decisions. You’ve got to make sure your books are up-to-date and accurate, so your financial decisions are based on fact.
Your expense tracking shouldn’t take you hours.
If you can’t check on the status of your expenses at a moment’s notice, you’re stuck in a state of expense reporting limbo. You’ll struggle to understand how much money you really have available (Problem #1). In turn, that impacts your ability to make business decisions, like whether to purchase office furniture or hire an employee.
Manually categorizing expenses means taking time out of your day every time you make a purchase. At minimum, you’ll need to spend hours at the end of each month going through your financial records, categorizing transactions, and determining whether you owe your business money or if it owes money to you.
You shouldn’t spend all your time reimbursing people.
If you aren’t using a business account and card for employees or co-founders, reimbursement gets tricky. It requires you to recall specific expenses and track down receipts from everybody. Also, it takes time to go through this process, which may not work for employees who want to be reimbursed right away.
Startups with multiple business partners frequently run into the reimbursement problem. By paying out expenses on personal cards and anticipating that the business will cover these transactions later, you set the stage for a potential conflict that could have been avoided.
First things first: Make sure you set up a business bank account and get business credit cards (we often recommend Brex for growing startups).
But getting a business account and cards isn’t the end of the story. You also need to make sure you develop the right processes and put the right tools in place so you can effortlessly keep business and personal expenses separate. Here are some tips:
If you’re already sitting on a list of transactions that need “personal” vs. “business” tagging, it can be a very manual, labor-intensive process that requires you to recall transactions from a long time ago.
Unfortunately, there’s no easy way out. Working with a bookkeeper can ease the process, but it’s still up to you to do the best you can with the information you have. Looking at your calendar to match events up with purchases is a good place to start. You may find it helpful to review the deductible business expenses guidelines to fully understand what you need to evaluate.
Once you have the existing expenses on your books properly categorized, you can implement the solutions above for future purchases.
It’s almost never too early to set up a business account. And you should always track expenses from the beginning. But if you still don’t have a business account when any one of these three events occur, it’s time to get one:
Tagging old personal and business expenses is painful, but it’s a necessary step to take before taxes are due. If you can stay on top of those expenses every month, it won’t just save you a yearly headache. It also means you’ll be better equipped to make decisions based on accurate financial information for your business.
Hopefully this article gave you a few tips that make it easier to keep track of your expenses going forward.
At Pilot, we have a team of expert bookkeepers using unique tools to automate the most error-prone aspects of bookkeeping. If you want to keep better books, try Pilot.