This month is all about financial priorities so I’m going to tell you the number one, most important thing you should do when you set up your business. Really, if you do nothing else for the financial health of your business do this one thing:
Set up a separate, exclusive business account
Not mind-blown? Yea, it’s true. Setting up a separate business account for your business is pretty basic BUT you would be surprised how many people don’t do this one, very easy, very important thing.
Also, did you notice that I didn’t say separate business checking account? That’s because I’m not just talking about a checking account. I’m also talking about a separate business savings account and credit card(s). If you use it for your business- separate it.
Ugh, but is it really that important to have all those separate accounts? I hate having to manage all that.
Friends, I’m saying this with all the love in the world for you: Too bad.
Separating your business and personal accounts is not only a good (and expected) business practice, it also will massively improve your understanding of your business finances and profitability. Oh, and you’ll save money.
Did I pique your interest with that last one? Yup, I’m dangling that carrot- the money saving, spend less, get more bang for your buck carrot.
Here are four ways separating your business accounts saves you money:
Makes Accounting Waaaaaay Easier
Having separate business accounts makes your record keeping process a lot more straightforward and less time-consuming. Why? Because instead of having to figure out if that lunch 3 weeks ago was business or personal- you know, without a doubt, if it’s in your business account, it’s business.
Tracking business expenses requires two questions- Is it business related? What deduction category is it? When you have a separate business account you automatically answer the first question. You’re automatically 50% done with your work.
So, just by opening a business account (and using it) you’ve reduced the work that goes into tracking your expenses. No more rifling through receipts, going back to check calendars for meeting schedules or logging into Amazon to figure out what on earth you ordered.
What can you do with all that extra time you aren’t spending sorting through your expenses? You can use those hours to for billable services or work on creating products that you sell. You can use that time makes money.
If you hire someone to do your books, having a separate business account can save you big bucks. Let’s have a little story time:
I have a client who, in our first year working together, all of her accounts were mixed. I was hired to catch up the previous year, which took me 25 hours because of the time required to sort through her business and personal expenses. Not to mention that then she had to go through 4 reports to further clarify her expenses. #notfun
The second year, at my pleading, she began to use her business account exclusively for business. It took me 18 hours to do her books that a year. Just by having exclusive business accounts my billable hours were reduced by more than a quarter.
To recap- having a separate business account saves you time that you can use to make money and saves your bookkeeper time so you pay them less.
If you do nothing else for your business do this one thing: set up a separate business accountClick To Tweet
Less Missed Deductions
You know what happens when you’re up late trying to finally take care of your business bookkeepingg and you have 6 months of statements to go through and you’re exhausted and all you want is to just be done? You stop being as thorough and start just trying to get it over with.
Enter: Missed Deductions.
Honestly, it’s really hard to catch every deduction when you’re accounts are mixed. There are just too many expenses and too many expenses that look alike. Something inevitably falls through the cracks.
Missing deductions costs you money. You don’t pay out of pocket for these but you do pay at tax time. Deductions are directly related to how much taxes you pay as a self-employed person, so the more you miss, the more you pay.
When you have a separate business account you can’t miss anything. It’s all there on one statement. All you need to do is categorize the expense and input it into an accounting program.
Here’s another thing- please- for the love of kittens- if you open a business account transfer all your business related auto-debits over to that account. Make sure you update your card numbers. Get your business expenses out of your personal account because I promise you, you want those deductions.
More Write Offs
Did you know you can write off your bank service charges, credit card fees, and finance charges? It’s true! But, there’s a catch. These accounts have to be business-use only.
Ahhhhhhhhh. Now you see why, earlier, I mentioned savings and credit card accounts. Because those accounts have fees. And you want to write off those fees. But you can’t write off those fees if you’re buying dog food with the same credit card you use to pay for your website hosting.
If you do have separate business accounts, here’s what you can write off:
Bank service charges- monthly service fees, ATM fees, overdraft fees, return check fees
Credit Card Fees- Annual fee, late fee, foreign transaction fee (because you’re only using this card for business travel, right?)
Finance charges
Sometimes adding up these fees can total upwards to the thousands, so writing them off is a major benefit to you. Remember, the more deductions you have a tax time, the less you will owe. Which means there will be more money to put towards the baby grand piano you’ve always wanted.
Protects You in an Audit
Okay, this is hypothetically saving of money, but seriously, if you are audited and have a mixed personal and business account, you will most likely be spending a lot of time and money to deal with it.
The IRS likes separation. They like it when they don’t have to go through your receipts for socks and underwear in order to find your receipt for printer ink. They loathe mixed-use accounts and, in an audit, the last thing you want is an irritated auditor.
You want your accounts to be pristine. You want them to look like pinnacles of business record keeping- neat, transparent, and well organized. A mixed-use account is none of those things. In fact, it’s the opposite.
Consider opening a separate business account as a preventative health measure- but the health we’re talking about is your financial health.
Now go forth and open that baby up!
More from my site
- The Epic Cheat Sheet to Deductions for Self-Employed Rockstars
- 10 Reason to Stop Tracking Your Expenses in a Spreadsheet (like right now)
- 4 Things My Dog Taught Me About Money
- The Ultimate Guide to Picking an Accounting Program You Will Actually Use
- Why Your Bookkeeping Is Behind and How to Deal With It
- How to Track, Record, and Write Off Credit Card Processing Fees
615 Shares
Francis Johnon October 16, 2016 at 4:33 am
This is really good!
Opening a business account might not be one one of those not-so fun things to do, but the benefits are undeniable.
Saving money and time are all the motivation I need to to push through it. Thanks for sharing.
Reply
amandasmilestoherself@gmail.comon October 17, 2016 at 6:16 am
Thank you! I’m thrilled this was helpful and hopefully you’re enjoying a post opening a new business account celebration as you read this!
Reply
Factor Loads Factoringon April 22, 2018 at 4:26 pm
I also prefer to separate my business account from my personal account. By doing this I can monitor if my businesss is growing.
Reply
Andi Smileson April 30, 2018 at 3:13 am
Great point!
Reply
Nova Cash Flow Financeon May 8, 2018 at 3:55 pm
I also do this. I separate my busines account from my personal account because I also want to separate my personal life from my work. I also think that it just proper to separate both account.
Reply
Andi Smileson May 9, 2018 at 2:15 pm
Yes! It absolutely is proper and makes accounting way easier!
Reply
We Factoron May 22, 2018 at 5:39 pm
I agree with all the things that you said. I think that it is ideal to just separate the business from personal account. I think that it is very easy summarized expenses and business profit if accounts are separated. You can also determine easily if the business is earning money or not.
Reply
Working Capitalon July 17, 2018 at 4:28 pm
Yes, I believe in what you said. I wasn’t separating my accounts back then. It is definitely making my accounting very difficult. Thanks for sharing these. Now, I have separated account and it is way easier. Thanks for sharing these article.
Reply
Factoring Financeon August 8, 2018 at 4:26 pm
Yes, I think that these article will definitely help a lot of new business owners. I also think that practicing to separate the personal and business account will really help for easier accouting. Thanks for sharing these article.
Reply
Julieon April 24, 2019 at 9:56 am
Hi Andi,
I have just discovered your articles and am so glad. The information is so concise and your explanations make a complex topic much easier to understand. Although I am Canadian the tax info is very similar and good business practices transport across borders.
I do have a question about seperate bank accts- I have a rental property, a registeted cleaning business and I do contract work with children with autism so really 3 small business ventures. I have one business acct for my cleaning business but put earnings from my other ventures into my personal chequing acct.
What do you recommend?Reply
Andi Smileson May 22, 2019 at 11:40 am
Hi Julie! Thank you for your kind words about my articles. Ideally, it would be great if you had a bank account for all three businesses so you can keep track of the income and expenses separately but if that’s not possible, use a tracking system (like QuickBooks Self-Employed) that allows you to easily distinguish between personal income/expenses and business income/expenses for the rental property and contract work. The idea is to make filing your taxes as easy as possible and be sure that you’re not missing income or tax deductions.
Reply
Debtor Financeon June 3, 2019 at 5:44 pm
Yes, I totally agree with what you said. I think that it is way easier to do the accounting when there is a separate account for business finances and personal finances. Thanks for sharing this article.
Reply
Oliver Rayon August 6, 2019 at 10:21 am
I liked how you stated that by having a business account you have already taken care of a lot of the work on whether or not that purchase was business or a regular life need. My brother is going to start a business and hasn’t always been the best with getting the most out of everything. It might be a good idea for him to make life a bit easier on him with a business account so he can easily keep track of everything that goes on.
Reply
Andi Smileson August 26, 2019 at 11:46 am
Yes! It’s so true- opening a separate checking account will TOTALLY make his bookkeeping easier, faster, and more accurate. Plus, lots of local credit unions have free checking accounts, so it wouldn’t even cost him extra money!
Reply