It’s a common mistake for first-time business owners. They assume because they’re just getting started and their business is small, separating personal and business finances isn’t really necessary. Not separating the two can lead to financial complications and confusion. Here are the primary reasons separating personal and business finances is important.
No one wants a visit from the IRS but, if it should happen, you want it to go as smoothly as possible. Separating personal and business finances will make the audit process less painful. Clearly differentiating between the two will make it easier for your accountant. It may also help you avoid an audit in the first place.
With no clear division of your personal and business finances, your personal assets could be at risk. Should someone file a lawsuit against your business, you could find yourself personally liable for any damages. Separating personal and business finances can also offer protection if you fall behind on business debts or your business fails. Vendors looking to get paid may take legal action. If your personal and business finances are commingled, unpaid debt or bankruptcy will put your personal assets and finances at risk.
It’s important for a business to be able to establish lines of credit with vendors or be able to obtain a loan if necessary. Not separating personal and business finances can make this difficult if not impossible. If both are mingled together, it will be hard for a lender to evaluate your cash flow, revenue, and other pertinent factors to make a determination. In most cases, this will cause a vendor or lender to pass on providing the credit or funding you need.
Now that you realize how important it is, you may be wondering about the best way to separate your personal and business finances. Here are steps you can take to divide them and avoid any confusion or complications.
An EIN (Employer Identification Number) is kind of like a social security number for your business. Once you apply, the IRS will issue the nine-digit number to be used for filing your business and payroll taxes. It will also be beneficial when completing some of the other steps necessary when separating personal and business finances.
Now that you have an EIN, you can move forward with establishing a business entity. Some small business owners prefer to be a sole proprietorship. However, establishing your business as an LLC (limited liability company) or a corporation will clearly identify your business as a separate entity. This will enable you to file separate personal and business tax returns and help to protect your personal assets.
Another important step in separating your personal and business finances is to open a separate bank account for each. You should also get a business credit card. Both of these will provide a clear paper trail of business income and expenditures. It will allow your business to establish credit and be helpful when applying for any type of business funding.
It’s important to establish a regular schedule for paying yourself, just as if you were working for someone else. Just randomly pulling money out of your business bank account whenever you need it can blur the line between personal and business finances.
It’s important to keep your personal and business receipts separate. Not only will this make bookkeeping easier but in the case of an audit, you want there to be no confusion between personal and business finances.
Although applying for alternative business financing is much easier than applying for a typical bank loan, separating personal and business finances will help ensure the process moves along quickly and efficiently.
If your business needs an immediate, short-term influx of capital to keep your business moving forward, CapFlow Funding Group may be able to help. Our team of professionals will evaluate your unique situation and help you determine which funding option would best suit your company’s needs. We service many different industries with a variety of different funding needs. In addition to invoice factoring and merchant cash advances, we work with trusted partners to provide additional merchant funding options. Contact us today!
Although they are often confused, business liquidity and working capital are two different but equally important financial factors for business success. As a business owner, it is important that you have a clear understanding of each and how to manage them. While veteran business owners may have a handle on this, improper cash flow management is what gets many entrepreneurs in trouble. Let’s start by defining working capital and business liquidity.
Working capital is defined as current assets minus current liabilities. If your business currently has $250,000 in assets and $175,000 in liabilities, your working capital is $75,000. In addition to cash, current assets include accounts receivable, inventory, and any short-term investments. Current liabilities include accounts payable, short-term loans, and other accrued expenses such as payroll or interest.
Business liquidity is directly related to your current assets and the ability to quickly turn them into cash. These are considered liquid assets. Liquidity allows you to pay current liabilities when they come due. Not only is it necessary for a business to continue daily operations but to promote growth.
When a business has enough cash or liquid assets to pay all of its current liabilities, it has positive working capital. How much working capital is needed varies from business to business. The ideal amount of positive working capital will cover current liabilities with enough excess to invest in business growth. Negative working capital is when your cash and liquid assets aren’t sufficient. Liabilities become past due and the business’s ability to sustain itself falters.
To improve your business liquidity, you must first take steps to increase your working capital. There are a few different ways to do this.
This simply means you need to get your customers to pay you quicker. You can encourage this by offering a small discount for early payment. You should also evaluate your invoicing process. Customers should be invoiced immediately upon receiving goods or services. Even waiting a few days before sending out invoices means it will be that much longer before getting paid. You can also reduce the amount of past-due receivables by conducting thorough credit checks and levying late fees. You can sell invoices to a factoring provider and get funds already owed to you before the payment is due. This is known as invoice factoring and is a great way to convert outstanding invoices into cash.
When was the last time you evaluated your business operations? If your business is running inefficiently, it’s costing you money and decreasing your working capital. By streamlining business operations, you can reduce payroll expenses. You need to take a long hard look at your long-term assets. These are typically business equipment or investments that aren’t vital and could be sold.
Even if you are effectively maintaining a high level of working capital and business liquidity, that doesn’t mean your business will never experience a gap in cash flow. When that happens, you’ll want to secure funding as quickly and efficiently as possible. A great way to do this is to establish a relationship with a lender and apply for funding before the need is urgent. It’s like using a credit card not because you don’t have the cash, but because you want to build your credit. With an established relationship backed by a strong payment history, you will have no trouble securing funding when you need it most.
As previously mentioned, the health of your working capital has a direct impact on your liquidity. By taking the necessary steps to improve your working capital, increased liquidity will almost certainly follow. It can help to delay the payment of liabilities until they are due and wait to invest any of your working capital in business growth until you can do it comfortably.
Maintaining your working capital and business liquidity is crucial, however, most businesses will experience a gap in cash flow at some point. When this happens, the CapFlow Funding Group can help. We specialize in invoice factoring and can help you determine if it is the right option for your business. We are dedicated to helping our clients find the best funding solution and can also connect our clients to options such as purchase order financing, inventory funding, and merchant cash advances. We service many different industries with a variety of funding needs. Contact us today or apply online. Get the cash you need to keep your business moving forward.
