If you are self employed or a small business owner, you have probably discovered that keeping track of your accounting and finances can be time consuming and occasionally frustrating. Unless you are an accountant, you’re never really sure if you are doing things correctly. Consequently, you procrastinate, which really just makes things worse at year end or tax time. To combat the problem it is important to have tools in place to facilitate the process and make it less painful, which could include accounting software and/or a bookkeeper as well as a good organization system for your documents, whether it is electronic or paper format. Another very simple measure that you can take is to have a separate bank account for your business.
Why Have a Separate Bank Account for your Business?
Setting up a separate bank account when you start your business is one of the easiest tools available to organize your finances. Even in the absence of accounting software, or for self employed workers who do their accounting at the end of the year (closer to tax time), a bank account that is solely used for business transactions can be invaluable in assessing where you stand with respect to your finances at any given time. By referring to the balance in your bank account you have a good idea of how much cash you have to spend on your business and how much you have to pay yourself. And although, unincorporated business owners do not technically pay themselves a salary for tax purposes (they are taxed on the profit earned from the business – amounts withdrawn are irrelevant), it is a good way to discipline yourself as you can limit how much you withdraw to a fixed monthly amount, while any excess funds are used to develop your business.
Another important to reason to have a separate bank account for your small business is to ensure the separation of business from personal transactions. In the event of an audit of your small business the revenue agencies are likely to ask for your bank statements. Providing them with your combined personal and business bank statements could lead to unnecessary questions and hassles.
Finally, online accounting software like Quickbooks Online and Xero allow you to download your transactions automatically thereby reducing data entry significantly and ensuring that all business related transactions are captured.
Limitations of a Separate Bank Account:
A bank account does not provide you information on how much your customers owe you or how much you owe your suppliers. Additionally, it does not give you information on cheques that you have issued, but have not yet been cashed. If you are usingyour bank account to track your finances, it makes sense to track accounts receivable, accounts payable and outstanding cheques separately.
Should you have a separate credit card for your business?
Yes, for the same reasons as above. Payments of your credit card balance should be made directly from your business account. Note that a credit card does not have to be a business credit card per se but just a separate credit card that is used mostly for business.
For this system to work it is important to be disciplined in using the bank account and credit card that have been designated, solely for business transactions.
Although there are extra fees with an additional bank account and credit card, keep in mind that these are deductible for tax purposes. Also, if you are not incorporated, the business bank account does not necessarily have to be a “business” account (which usually carry higher fees), but can just be a separate account. Similarly your credit card can just be another personal credit card that you use solely for business. Of course, if you are a registered business with a name different from your own, then you will have to set up a separate bank account.
While have a proper accounting infrastructure is important for every business owner, no matter how small, it can be difficult for the self employed to have time to take care of all aspects of their business with limited time and resources. The simple step of setting up a separate bank account and credit card for business purposes only can really help small business owners have better control over their finances without having to do much in the way of additional work.
Ronika Khanna is a Montreal accountant who helps small business owners with their accounting and tax issues. Do not hesitate to contact her regarding your small business or self employed accounting and tax set up and queries. To receive regular blog updates pertaining to small business, accounting, tax and other topics of interest to small business owners you can sign up here. You can also follow her on Facebook or Twitter.