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