You want to make your business a big success, right? Well, if you’re serious about cleaning up in business, the first thing we recommend is cleaning up your books. Whether you’ve just started up or you’ve had the “Open for Business” sign over your door for years, it’s never too late to get your finances in order.
Lift your head up from the day-to-day tasks of your business and take a pause. Specifically, take a moment to find areas where you’re mixing business and personal finances - something you should always avoid. Today, the temptation to mix your finances is huge, especially given the trend toward more home-based sole proprietorships. Over half of all U.S. businesses are now home-based and the vast majority of businesses are solo acts launched with credit cards, home equity lines, and other personal financial resources. But this isn’t justification to be sloppy or lazy about distinguishing your personal from business finances - on the contrary, it’s all the more reason to be very disciplined about keeping things separate.
When you commingle funds, the true performance of your business quickly becomes hard to pin down. It’s a challenge to establish hard numbers for expenditures and revenues. Your accounting and tax filing becomes more complex (and expensive due to added hours required). What’s worse, future financing opportunities are negatively impacted - lenders and most equity investors will ask to review the financial performance of your business in previous years. If they can’t make sense of your books, they’ll be less confident and less inclined to provide you the financing you seek.
On the flipside, keeping clean books has many benefits - for example, there are potential tax advantages such as deductions. Keeping clean books can also keep you off the “radar screen” of the IRS, thus avoiding “distracting” IRS audits. Clean books are a key asset in the eyes of financiers—they’ll see that you’re organized and responsible. Bankers, in particular, will be able to create a clear picture of your financial performance when considering providing you a loan. At a strategic level, well-organized books provide clarity about the true performance of your business so you’re better equipped to make important decisions. And if you ever want to sell your business or bring in partners down the road, having a crystal clear set of books will be a fundamental tool for valuation as the new parties become involved.
There are many real-world circumstances where you’ll be confronted with choices to make about mixing personal and business finances. For example, you might have to use personal credit to secure assets, or you might have to move money from a personal account to a business account to cover a shortfall. Perhaps you’ll need some extra cash personally and will want to take that cash out of the business. The key is making sure that you do this in a completely organized and well-documented way to minimize any negative impact.
Our Bottom Line
It’s important to act like a business even if your board room is in your basement. Whether you’re in full gear and taking orders, or just starting up a business, tackle those business finance issues - there’s no time like the present to clean up your books so you can clean up in business!