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basic financial planning #6: Keeping it in its place

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Blog entry by BigTiny posted 03-07-2011 10:50 AM 3560 reads 1 time favorited 8 comments Add to Favorites Watch
« Part 5: Okay, what's next? Part 6 of basic financial planning series Part 7: A place for everything »

Good evening group.

Tonight we talk about the separation of business and personal. No, I don’t mean keeping your spouse out of the shop. I’m talking about money.

One of the very first things you need to do is set up a separate bank account for your business. Then keep it separate.

This means, for instance, if you need to “top up” the business account to cover some expenses, you do not pay that expense out of your personal account. You “lend” the business the money, then deposit into the company account, then draw a cheque from it to pay the business expense. When there is enough in the business account to recoup that money, cut yourself a check and note it in the books as “loan repayment.” If you get nothing else from tonight’s ramblings, get this: keep track of your business money and keep it separate from your personal funds.

You should go so far as to pay yourself a wage (once you’re doing well enough to do so”. Never just take out “a few bucks to tide you over”. This is a bad habit. Exercise some self discipline. Getting into bad habits like this will give your bookkeeper prematurely gray hair and make the tax man your permanent guest.

If you worked for someone else and helped yourself to company funds, you’d get arrested! Treat yourself like an employee.

Now this doesn’t go only for the bank account. You should have a separate business credit card too. (and for the love of hardwood, do not carry a balance from month to month. Credit cards are great if you pay them off on time. It’s like getting a free loan for the balance for about a month, but if you carry a balance, you are paying horrendous interest rates. )

Use the company card to pay for such things as gas for the business vehicle, business entertaining, buying tools or materials and so on. Cash is for birthday cards to grandkids. Plastic is the modern way, and you automatically get a receipt without having to ask for one.

If the receipt doesn’t list what the purchase was, write it on the back right there and then. You don’t need to go into too much detail. “Dinner for Harry Doe, potential client” is enough, we don’t need the menu.

If you are buying things with different tax classifications, make it easier on the bookkeeper and get separate receipts. Things like power tools are written off over a number of years as depreciation, while consumables like nails and screws can usually be written off immediately. This point isn’t critical, but it’ll make the bookkeeper’s life a bit easier. Since you may be your own bookkeeper at first, it’s your own life that will be easier. (grin)

At first, when you don’t have a registered business name and such, how do you go about getting such a separate account? Talk to your banker and explain what you are doing. He will probably suggest another account much like what you have now, with the only difference being where your present checks read “John Doe, 123 Any Street”, the new ones could read “John Doe, Woodworker, 123 Any Street”. Simple, minor difference, but it tells those who receive one of these checks that they are dealing with a businessman.

When you are doing well enough to have money left at the end of the month (instead of month left at the end of the money), it is time to decide where to keep it. Do not keep it in the company account. Half a month to a month’s worth of transactions is a good rule of thumb as to how large a balance you need. This avoids bounced checks and rushes to the bank to make a deposit in time to beat a check there.

By now you have decided on how much you will pay yourself each week. Any excess should go into a short term interest account of some sort. Your bank manager is a good adviser on what kind is best for your circumstances. Make sure it is earning you some interest and yet can be accessed in an emergency. Something like a major power tool going boom at just the wrong time. (remember Murphy’s law?) This account should still be in the company name, not yours. That way the interest earned is income to the business and will usually be taxed at a lower rate than your personal tax rate.

Well, it’s nearly 3:00 A.M. here and I need my beauty rest or I tend to scare small children, so goodnight to all.

Paul

-- The nicer the nice, the higher the price!



8 comments so far

View Sheila Landry (scrollgirl)'s profile

Sheila Landry (scrollgirl)

9040 posts in 2383 days


#1 posted 03-07-2011 01:41 PM

You hit on one of my biggest issues – separating business from personal. Since my business is a “sole proprietorship”, when I started out I was kind of led to believe that they were pretty much one in the same, so I figured it wasn’t “that bad”. As my business is growing however, I can see how it can get confusing.

It is very difficult when you are struggling to separate the two. Bills need to be paid and if the business account is where the money is, it needs to be used. With the month to month being so erratic (one month could be great and another very slow) it adds to the difficulty of working on a typical ‘budget’. Until you build enough capital to cover those day to day expenses on the slow months, it is hard not to use whatever money is there to keep things going.

Ideally, I think the business should have a reserve to cover the slow months without touching the ‘personal money’ but what do you do until you get to that point? Any suggestions?

Thanks again for a great blog.

Sheila

-- Designer/Artist/Teacher. Owner of Sheila Landry Designs (http://www.sheilalandrydesigns.com) Scroll saw, wood working and painting patterns and surfaces. "Knowledge is Power"

View anjelahills's profile

anjelahills

1 post in 2101 days


#2 posted 03-07-2011 02:19 PM

I was very encouraged to find this site. I wanted to thank you for this special read. I definitely savored every little bit of it.

Maple Syrup Diet

-- [url="http://healthmantra.co.uk"]Maple Syrup Diet[/url]

View NH_Hermit's profile

NH_Hermit

394 posts in 2559 days


#3 posted 03-07-2011 02:36 PM

Again, some good advice! This one takes discipline as one goes thru the busy business of daily living.

-- John from Hampstead

View chrisstef's profile

chrisstef

15666 posts in 2469 days


#4 posted 03-07-2011 03:32 PM

Big Tiny .. you hit the nail on he head with this one. Fresh out of college i started worked for a company that seemed to be growing in leaps and bounds every year. After a few years in the field i ended up in the office as an estimator. Right then and there i knew somethin was up. I was green (and still am) but i had just finished business school and somethin smelled rotten. The owner was using the company account as a personal checking account, putting everything on credit cars, and paying peter with paul’s money. Needless to say the company and i parted ways and 2 years after that they folded up. Keeping your personal account and your business account is supremely important. Both for business and health.

Well written and well explained Tiny

-- rock, chalk, jayhawk

View Bearpie's profile

Bearpie

2601 posts in 2481 days


#5 posted 03-07-2011 08:18 PM

I think this is the “KEY” area where most new business owners have problems with (I, for one) and it is very difficult to get out of once you start without a lot of discipline. I can attest to that! Good blog Paul! (I hope you are not the Paul I used to rob to pay Peter?) :-)

Erwin, Jacksonville, FL

-- Erwin, Jacksonville, FL

View BigTiny's profile

BigTiny

1676 posts in 2351 days


#6 posted 03-07-2011 09:17 PM

Greetings all.

Thanks again for the positive feedback.

Sheila, your point about having a cushion to get through the lean months is a good one. I know that it can be tough to keep your head above water when the bills keep coming but the jobs don’t. All I can say is to hang in there and try to keep busy. Maybe do some lower paid stuff you normally wouldn’t bother with until thinks pick up again. Anything to keep the cash coming in.

Bearpie: yes, I am the Paul you used to rob to pay Peter, and I want it back! (grin)

-- The nicer the nice, the higher the price!

View Div's profile

Div

1653 posts in 2403 days


#7 posted 03-07-2011 10:09 PM

Thanks for the advice and effort Paul.

-- Div @ the bottom end of Africa. "A woodworker's sharpest tool should be his mind."

View boardmaker's profile

boardmaker

35 posts in 2100 days


#8 posted 03-08-2011 09:05 PM

Great Blog,

I appreciate the advice.

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