When business owners fail to separate their business money from personal money,they are likely to end up in the category of an employee and the self employed. On the other hand, when you have successfully learnt the art of separating the two, then you move to the business owner and investor category. The good thing is that everyone starts from the left side of the quadrant and eventually grows and moves to the right side of the quadrant. Here are some tips to help you move from left to right.
This is most difficult especially for founding owners of businesses. Your business should have its own identity different from your own. Start by giving your business a name and registering it either as a sole trader, limited company or partnership. Then open a different bank account under your company’s name and allow all the income produced by the business to go into that account. A good control would be to have a second trusted person to sign on the account alongside you so that it is not just you who can make withdrawals. Accountability with a trusted partner can save you from making bad business decisions.
By building an accounting system you will be able to account for all your business income and expenses accurately. It will be a good idea to give yourself a suitable salary to compensate you for your efforts in building the company. An accounting system will also help you separate your tax obligations from those of the business and your personal obligations. It is also critical to create two budgets, one for your business and one for your personal needs. Your business budget will show you how much money the business plans to make and where all the income will be spent. Your personal budget on the other hand will help you manage your lifestyle and ensure that you are not living beyond your means. Your personal budget is a good tool in determining what salary you would require from your business, while the business budget will determine whether it is able to pay it.
You must develop a plan on how you intend to grow your business. The absence of this plan will increase the risk of misappropriation especially if your business is doing very well. Savings for both the business and your personal lifestyle is a must. The business must operate a different savings account from your own savings. If yours is a start up, make sure you have put six months to a year’s worth of savings for your personal needs like rent, food and utilities bills so that you give your business sufficient time to grow. As your business grows, you can decide to reward yourself from the business with taxable benefits such as savings in a pension plan or a mortgage plan. The business can also plan to invest in assets such as a company car, computer machines that will reduce your tax obligations via allowable expenses and depreciation.
Once your business is strong enough to diversify its asset base, for example in land and building or even acquiring other companies, it is advisable that your put these assets in the name of the business and not your personal name. You must only acquire your personal assets from your personal savings. Having your assets under the business name will ensure that the income the assets generate are captured under the business and therefore allow the business to grow stronger. Investing in a good financial system in your business, will ensure effective management of these assets which means you can have a wider portfolio and more free time for yourself while the money is working for you.