They say that you should never mix business with pleasure – but when it comes to finances, the two are connected in a number of ways.
Because of the connection between corporate finances and individual finances, it’s important to understand that, while you can approach both in very similar ways, it’s not always a good idea to allow the two to mix.
Before we talk about how to keep your corporate and individual finances separate, let’s first look at their similarities and differences:
Similarities Between Corporate Finances and Individual Finances
The similarities between corporate finances and individual finances all come down to money management. No matter the amount sitting in your accounts, how you handle it determines your overall financial success!
When it comes to managing finances, both corporate and individual, discipline is important. In order to be successful, you need to focus on spending only when necessary.
If you’re running a company, it can be tempting to spend on unnecessary assets but you need to limit your spending to expenses that are pertinent to running and growing your business.
For personal finances, it’s important to curb spending in order to build up savings.
Whether you are looking to expand your business or your bank account, you need to make investments in order to grow your funds. In your personal life, this could mean purchasing a home. In business, investing could involve hiring new staff or purchasing new equipment.
Both personal and business finances require budgeting. This involves laying out how much money comes in versus how much goes out and seeing what is left over.
Budgeting takes time and effort – even more so for businesses and companies. In order to effectively budget, you need to involve formal documentation such as income statements and balance statements.
Overall, budgeting requires you to set a spending limit and stick to it so you can achieve your financial goals over time.
Differences Between Corporate Finances and Individual Finances
It’s great that you can approach both corporate finances and individual finances in the same way when it comes to budgeting and investment, but there are some ways that business finances are handled that can be detrimental to an individual.
We talked about how corporate finances and individual finances both involve a degree of discipline but one notable difference between the two is that managing personal finances comes with significantly more temptations.
Business finances tend to be more impersonal and purchases are made in the best interest of growth and success.
However, individuals tend to struggle with the temptation to make unwise or extravagant purchases.
Corporate financial decisions are usually made more rationally than personal financial decisions
When a business makes financial decisions, it usually comes as the result of collaborating with staff members, co-owners, financial offers, and accountants. This is to ensure that spending solutions make sense for the company.
Individuals, however, are often not required to confer with family members or any other person to make financial choices.
One benefit corporate finances have over individual finances is the use of leverage. Businesses can use leverage as an investment strategy and borrow money to invest in the company’s future.
When done right, leverage is a practice that can help support small businesses by accessing capital in order to expand.
Using leverage when it comes to individual finances is extremely risky and result in devastating losses such as losing your car or your home.
Keeping Corporate and Individual Finances Separate
Even though there are similarities between corporate and individual finances, it’s important to keep them separate.
It’s important to remember that a corporation is an independent entity that should be free-standing from your personal finances.
Here are some reasons why you should keep your corporate and individual finances separate:
- Leverage: As we mentioned above, leverage can be highly beneficial for a company but potentially devastating for an individual.
- Taxes: You can take advantage of tax deductions and write off business expenses when you keep your business finances separate from your personal finances.
- Business Credit: Obtaining working capital for your business and business credit is key to securing larger business loans.
- Professional Image: Keeping your company and personal finances separate makes you look like a serious business owner and not just someone who monetized a hobby.
- Time and Money: When you keep your corporate finances separate, you can utilize the skills of a professional accountant to streamline your financial process, save you time, and save you money.
How to Keep Your Corporate Finances and Your Individual Finances Apart
When it comes to corporate and individual finances, the “how” is probably just as important as the “why”.
Here are some tips for keeping your finances apart:
- Hire an Accountant: A Certified Personal Accountant (CPA) can ensure your company’s bookkeeping is done properly and that your finances remain separated.
- Open Separate Accounts: Creating individual accounts for yourself and your business will help you distinguish between your finances.
- Business Credit Card: A business credit will allow you to make company-related purchases without using your personal card. It will also help you build credit for your business.
- Separate Your Receipts: Ensure that your business receipts and your personal receipts are organized and stored separately so you can easily access them without confusing the two.
- Structure Your Business: Establish a legal structure for your business in order to disentangle your personal finances from your business finances.
- Pay Yourself: Instead of randomly pulling money from your business to take care of your personal finances, pay yourself a salary to help your company stay on budget.
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