As a business owner, it's tempting to use your personal credit card or bank account for business expenses or vice versa. After all, it may seem easier to keep track of just one account, and you may think it's not a big deal since you're the one who owns the business.
However, mixing personal and business expenses can quickly become a financial nightmare that makes your accounting more difficult and less accurate. Here are some compelling reasons why it's not a good idea to mix the two:
#1) Lack of Accuracy in Financial Reporting
Accurate financial reporting is crucial for managing your business effectively. Mixing personal and business expenses can create confusion and make it challenging to determine which expenses are personal and which ones are business-related. This can lead to inaccurate financial statements, which can impact decision-making and hinder the growth of your business.
For instance, if you're using your personal credit card for both personal and business expenses, it can be cumbersome to separate and categorize each expense correctly. You might miss important tax deductions or overstate your business expenses, which can lead to incorrect financial statements and tax filings. This can result in penalties, fines, and increased scrutiny from tax authorities, putting your business at risk.
#2) Difficulty in Tracking Business Expenses
Mixing personal and business expenses can also make it challenging to track and manage your business expenses effectively. Separating and organizing expenses becomes time-consuming, especially as your business grows. It becomes harder to identify which expenses are essential for tax purposes, reimbursement, or record-keeping.
For instance, if you're using your business account for personal expenses, it can be challenging to identify legitimate business expenses for tax deductions or reimbursements. You may inadvertently claim personal expenses as business expenses, leading to tax discrepancies and legal issues. Additionally, if you're using your personal account for business expenses, it can be challenging to track your business' cash flow, profit margins, and other financial metrics accurately.
#3) Legal and Liability Risks
Mixing personal and business expenses can also expose you to legal and liability risks. When you commingle personal and business funds, it can blur the legal distinction between you as an individual and your business entity. This can result in the loss of limited liability protection, which is a fundamental benefit of operating a business as a separate legal entity, such as an LLC or corporation.
For example, if your business is sued or faces legal claims, having mixed personal and business expenses can make it easier for plaintiffs or creditors to pierce the corporate veil and hold you personally liable for business debts or legal judgments. This can result in personal financial loss, putting your personal assets, such as your home, savings, or investments, at risk.
#4) Accounting Complexity and Cost
Accounting can quickly become more complex and costly when personal and business expenses are mixed. It requires additional time and effort to sort, categorize, and reconcile expenses to ensure accurate financial records. This can lead to increased accounting costs, especially if you need to hire a professional accountant to sort through the mess and ensure compliance with laws and regulations.
Moreover, if your business is subject to audits or financial reviews, the lack of separation between personal and business expenses can raise red flags and trigger additional scrutiny. This can result in increased audit costs, penalties, and fines for non-compliance, further impacting your business' financial health.
While it may seem convenient to mix personal and business expenses, it is a risky practice. Establishing a clear separation is crucial for maintaining accurate financial records, making informed decisions, and protecting your business' financial health. Otherwise, you could end up with accounting inaccuracies, legal liabilities, and increased costs further down the road.
If you find that you need assistance in either preventing or correcting co-mingled expenses, SIMPLY Financials PLUS can help. We work with businesses to set up best practice solutions utilizing QuickBooks and other available third party applications. Contact us at simplyfinancialsplus.com/contact to learn more about what we can do for your business.