Being an entrepreneur exposes you to your fair share of rewarding and challenging moments.
While a big chunk of these moments are out of our control, we can hold influence in a handful of them as well. In fact, by making some adjustments in your business approach, you can significantly streamline the process and keep a tight grip on your expenses and cash flow.
So what are these common entrepreneurial mistakes?
One subconscious mistake many entrepreneurs make is sticking with a personal bank account for their business. Even if you’re raking in revenue and have an upward trajectory, using a personal bank account to store your funds can be detrimental to the future health of your business.
There are many reasons why using a personal bank account for your business is a bad idea, but one primary one is how it can lead to financial mismanagement issues.
Want to know more? Here are 10 common mistakes people make when sticking with one bank account for both their personal and business finances.
1. You Lack of Clear Financial Boundaries
As an entrepreneur, it’s important to maintain a sense of discipline over yourself. After all, you’re in charge of your livelihood and income and the income of your employees as well.
If you use only one bank account for personal and business use, it can blur the lines of your entitlement over these finances.
For instance, you may be tempted to overindulge and get money from your business revenue without looking into how it’ll affect your cash flow and operations.
Conversely, you can develop a habit of overextending yourself and limiting your actual entitled personal income, which can lead to burnout and a dip in your quality of life.
Having clear boundaries can help keep you accountable for yourself and your business. This, in turn, can foster both financial and mental health and well-being. Click here to learn more about opening a business bank account.
2. You Can Misdeclare Tax
Mixing personal and business finances can lead to discrepancies in what you actually owe tax authorities.
For instance, not everyone can vividly remember whether that takeaway food from three weeks ago was for your staff members or your family, for instance. Misdeclaring one as the other can lead to severe consequences if found out by local tax authorities.
Furthermore, putting both expenses in one bank account can make the entire process of tax filing take significantly longer. This could put your business at risk of obtaining a time penalty and a negative mark on your reputation as a dutiful taxpayer.
3. You Inaccurately Track Your Expenses
Whether you’re relying on a team to deal with your finances or doing it yourself, putting both expenses in one account increases the risk of erroneous tracking.
This can cause income statements and balance sheets to record the wrong total amount, leading to unbalanced and inaccurate records.
This can spill over to other business documents, such as future documents and income statements.
When this occurs and is found out, your business’s entire financial backbone would need to undergo a major corrective overhaul, which can take valuable productivity hours away from your company.
If you want to prevent that from happening, keep your business finances and personal finances in a separate bank account.
4. You Jeopardize Personal Assets
If you’re using a personal bank account for your business funds, it’s likely the case you’re not an LLC.
An LLC, or a limited liability company, is a business structure that protects the owner’s personal assets in case of bankruptcy. In order to run an LLC, it’s mandatory to own a separate business bank account.
By mixing both business and personal funds in one account, you’re signaling the fact that you own a personal bank account and you don’t have a security measure for protecting your assets.
This can make debtors chase your personal loans in the event that you’re unable to pay your obligations.
5. You Can’t Raise Capital Easily
Many small businesses get their much-needed breakthrough when large venture capitalists and crowd funders inject capital into them.
But for these entities to support a small entrepreneur, they’d need to find promise in their ability to grow and sustain their growth.
If you don’t separate your business and personal accounts clearly, you’re showing these big players that you’re not taking enough action to scale appropriately. This can make acquiring capital tremendously more difficult.
6. You Can’t Grow Bigger
Venture capitalists and big-time investors aren’t the only stakeholders you need to impress.
You also want to be seen as trustworthy by the people you have everyday dealings with. This includes your partners, merchants, your clients, and even talent within your team.
With a business bank account, you signal to these important folks that you have a legitimate brand and process. This can make it easier to score bigger and longer-lasting contracts, attract more skilful workers, and even partner with bigger companies.
If you mix business and personal finances, you’re essentially shooting your brand reputation in the foot. So do prioritise getting a business bank account—it’s not difficult at all, especially if you already have the necessary business documents.
7. Financial Projections Will Be Compromised
A lot of businesses put heavy weight on future projections when making major business decisions. These projections are usually founded on historical data and tight, formulaic processes.
In most instances, these projections are highly effective indicators of profitability and growth thanks to the effort of thorough data crunching and analysis.
However, if the figures being utilised are wrong, then it’ll clearly follow that the future projections will be compromised as well.
A wrongful entry likely won’t happen when there’s a separation between personal and banking accounts. However, keeping these two categories mixed can lead to potential errors.
Depending on the severity of the mistake, this can have big ramifications for your business. To avoid it, keep those finances separate.
8. Overlook Business Deductions
Travel expenses, office supplies, and certain equipment can look like either personal expenses or business expenses at a glance. And if you’re unsure about the purpose behind these items, you could end up wrongfully categorising them.
Furthermore, with personal entries cluttering your financial books, actual deductible entries can go unnoticed.
This can lead to you paying more than you need to, causing less cash to enter your pockets and a smaller amount of funds to power the business operations.
9. You Make it Harder to Secure Loans
Lenders are highly critical of your business profile and financial records. This is because they want to ensure that you are trustworthy and well-compensated enough to pay off the loan that you’ve requested.
If you fail to show them a business bank account, they can be skeptical of your abilities and make it harder for you to secure a loan. And even if you do get approved, it’s unlikely that you’ll get as good of a deal as you’d like since you lack a clear financial trail.
The most straightforward way to overcome this, besides making timely payments for all your debts, is to have your own business bank account.
10. Impaired Productivity For You and Your Workforce
Mixing business and personal funds can seem like a quick way to deal with your money. After all, if everything’s in one place, you’ll have fewer bank accounts to juggle and access, right?
While it may seem easier to make a personal bank account act as a business one as well, it can add unnecessary strain to you and your workforce when the time comes to actually account for these expenses.
Since your personal items are tallied together with your business expenses, accounting software won’t be able to distinguish the difference between the two.
An actual person, if not you yourself, will have to sift through all these journal entries and correct them. This can be a big time-waster.
However, the good news is that it’s 100% preventable if you open up the appropriate type of business bank account for your needs.