NASE Blogs

Balancing business and personal finances

Jul 20, 2010

There never seems to be a lack of challenges when it comes to finances ... especially when you’re trying to balance both your business and personal income and outflow!


If you’re like tens of thousands of entrepreneurs across the country it’s not unusual to have to make some tough financial decisions from time to time ... “Who do I pay this week? The credit card company that I know is about to hit me with late fees ... or the printer who is holding my direct mail piece that I hope will bring new customers and dollars in the door.” It’s a lot like the chicken and egg syndrome isn’t it?


While just about every small business runs into financial crunches from time to time, if you have made it though the first year or two in business and are still robbing Peter to feed Paul the problem might be more with how you handle your finances than how much in revenues you are bringing in the door.


After talking to a few thousand business owners about their money crunches ... here are my top three from the trenches rules to balancing your finances. And it doesn’t matter how big ... or how small ... you are, these tips apply to every business.


Rule #1 (The Golden Rule) ... Don’t mix personal and business monies. Make sure you are operating your business and personal finances from separate checking accounts and make sure all business monies flow through the business account. Even when you take money for yourself, write a check payable to you ... never to cash ... from the business account and deposit it into your personal account. A common fallacy that causes problems for business owners is the attitude that “I own the business and everything in it does belong to me. So why shouldn’t I be able to do anything I want with the money that comes into the business?” The problem is that if you’re serious about succeeding you’ll run the business like you want it to succeed ... and that means having rules that even you have to follow. Taking a casual attitude about your business and its finances is a sure road back to working for someone else ... who hopefully knows how to run a business!


While this first rule should be good business sense, it also gives you an advantage if you’re ever audited. One of the best defenses you can have in an audit is a good clean audit trail of financial activities in the business. Putting a bank statement mixed with business and personal records in front of an IRS auditor is asking for trouble.


Rule #2 ... Treat yourself like an employee. Instead of taking out what would be equated to a “paycheck” most business owners take money out “when they can.” Don’t take a haphazard attitude to paying yourself. Instead cut yourself a check in a regular amount and on a regular basis. Then learn to live within your means. Even if you’re in the early stages of business and the money isn’t flowing, set a small amount to take out every week or two. It’s a habit that will help you keep things under control. And if you’re operating as a sole proprietor, don’t forget that for every dollar you take out for yourself you’ll have to hand over another 35 or 40 cents to the tax man.


Along with this rule, don’t pay any of your personal bills out of your business account. Just like keeping a separate checking account for your business, if you are ever audited and that nice IRS person starts seeing personal expenses being paid out of the business account ... you’re asking for an audit from hell.


Rule #3 ... Produce monthly financial statements and look them over carefully. Your checkbook can be deceiving of what your real financial situation is and give you a false sense of success. It might look like you’ve got enough in the bank for a dinner out in the best restaurant or a nice weekend at a spa ... but if you haven’t taken into consideration the bills you still have to pay, or the purchases you’ve made but haven’t even seen the invoices yet ... your adrenaline could get the best of you. The only way to know how much, or how little as the case may be, real money is in the bank is to take a hard look at your financial statement ... every month.


All of these might seem like some pretty simple guidelines to a lot of you but I am here to tell you ... from thousands of one-on-one conversations with entrepreneurs ... that what I am telling you is the rule and not the exception. You can be assured that the above are the three situations that get the majority of entrepreneurs into trouble. If you follow the three simple rules I have laid out you will be in a better position to balance your business and personal finances. If you don’t follow these rules, it’s almost guaranteed you’re going for a ride on the wild roller coaster of financial feast and famine.

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