When you first begin a business, there is an inevitable stage where you invest some of your personal money into the enterprise.
If you are opening up a large-scale business, you will usually be using some of your personal money as seed capital. You take a share of the ownership in exchange for control on the board of directors, for example. However, the line is usually clear between your personal financial stake and what the business owns and owes. It keeps things nice and simple.
For those running a lifestyle business, the lines are much less stark. There is no board of directors: there’s just you, doing the best you can to make your idea into a business reality. You are everything to the business. You’re the designer, the social media manager, the accountant, the customer service agent. For these lifestyle businesses, the mere concept of a work/life balance seems ridiculous, because the two meld together so seamlessly.
It therefore seems natural that, as a part of that, your personal funds become the business funds as well. Maybe it starts innocuously, such as deciding to forgo a morning cup of coffee at a coffee shop so you can buy some stationery for the business. Then it pushes onward.
Without careful control, before you know it, you are assessing your funds – and you can’t see where the business begins and you as a person end. They are all blended together; the same accounts and money that are used to pay a business supplier are also used for new curtains in your house. It’s a tangled mess.
The most troubling thing about this all-too-familiar state of affairs is that it’s a mess many lifestyle business owners don’t see any problem with. “The clue is in the name!” they insist. They’re a lifestyle businesses; there to provide a lifestyle for the person running it. You’re not looking to take over the world or expand; you’re just looking for something profitable enough to keep you away from working for someone else. So what does it matter if the two sources of income and expenditure are blended together?
It matters quite a lot, actually.
Tax Time Is Going To Be A Nightmare
Is there any phrase more miserable in the English language than “do your taxes”?
If you blend together your business and personal finances, then that phrase is going to take on a whole new meaning of hell. From that knot of financial mess, you have to extract information – and it’s going to take a very, very long time to do it. Too many of us running small businesses are guilty of pushing it into the background, into the territory of “I’ll take care of it when I have to”. But that time will come, and by keeping the two financial histories running alongside one another, it’s going to be even more unpleasant than it has to be.
Financial Peril Gets Even Worse
There are benefits to keeping all of your financial affairs in one pot. Aside from tax time, it’s generally easier as you only have to deal with one set of accounting.
The problems come when you find yourself in the position of debt. There are times in business when you have to take on debt; in fact, it’s almost a necessity if you want your company to thrive. However, if you don’t have proper separation of the two sides of your financial life, than that debt isn’t just threatening your business – it’s threatening you. If it comes due and you can’t pay, then there’s a good chance creditors will expect you to dip into personal funds to clear it.
Then there is the impact your personal finances can have on the business side. If you have bad credit, personal debts that force you to get a loan, or – worst of all – default on a payment, then it’s going to show on any financial health report for your business too. It could even be impacted by the person you live with, as finances tend to be tied together by credit reference agencies. Your business might be booming, but it will be tough to tell if your personal status isn’t quite as it should be.
Then there is the fact that you could be the slickest, most on-the-ball business owner that the world has ever seen – but that doesn’t mean that your personal finances are in good shape. The bleed between the two will impact both sides, and it will predominantly happen in a negative way.
If You Do Want To Expand, Life Gets Tough
While you might not think your business will grow to the point of expansion, it seems a bad idea to rule out the possibility of success booming and a larger future calling. If you do reach that point, then any potential investors or creditors – such as a bank providing a business loan – are going to want to see the company finances.
You might think that being able to point to an overflowing checking account would solve the issue, but they will want to get down into far more detail than that. In fact, some lenders won’t even consider you until you completely separate the two sides of your financial matters. That means not only will you be trying to oversee a business expansion, but you’ll be panicking over the financial process too. Why not save yourself some stress and do it sooner than later?
So yes, while there is an ease to keeping your finances all in one place with a lifestyle business, it can be far more trouble than it’s worth. It might seem like a grand gesture to go and open a business account; a little too entrepreneurial for something you still consider a hobby as much as anything. But it’s a step you have to take, sooner rather than later. Even if your business is just starting out – in fact, especially if your business is just starting out – then there is a need to keep the two things on different sides of a chasm.
You can still invest in your business of course – and pocket the profits. It just needs to have a clear line of division, so when money moves between them, you can track it from both sources. It’s the best thing you can do for the health of your business’ financial future – so what have you got to lose?
