When we start a business, we usually put our money into the business. But, as our business grows, we think the business money belongs to us.
Then, we begin to pay our bills with the business money and vice-versa. However, this practice will eventually prevent our business from growing even more.
Here are four reasons you can’t mix your business and personal money1.
1. It’s tough to control it.
When you start the habit of thinking that your money and business money are the same, you won’t control them and separate them. So, you will work hard as you do, but you will think that your company is not making the money you expected. You will check your business bank account and see that there’s not much money. That’s because you used that money to pay your bills. So, create the habit of using the money separately. But, if you use your money to pay business expenses once in a while, don’t forget to save the receipt and reimburse yourself from the business bank account.
2. You take more money from the business that the business can support.
You want to increase your lifestyle when you start getting new clients and making more money. So, buy a new car, a house or anything you want. After a while, your business has a challenging moment (it’s standard in entrepreneurship’s life), and you make less money than you are supposed to. So, as you took the money from your company, you don’t have enough money to pay the business operation expenses, such as employees, materials, and everything else. Then, to keep your business running, you need to inject money. Thus, you have two options: borrow or put your own money into the business. You’d need to sell your things if you didn’t save money to save your business. If you want to avoid this scenario, the best practice is to set up a salary that covers your expenses, and your business can pay you without compromising its cash flow. Even though the company has high or low moments, you will have your salary. It’s part of the business cost.
As your business generates more money, you can pay dividends once or twice a year. So, you will have more money without impacting your company.
3. You pay more in taxes.
As we discussed, when you mix the money, you don’t control it and don’t put the expenses on a spreadsheet or app. Consequently, you don’t reimburse yourself from the business account. Thus, these business expenses are not on your business Profit and Loss. When the tax season comes, and you file your tax return, you get a large tax bill. So, your tax preparer or CPA shows you that your net income was higher than you think. As you don’t know how much you spent with your money and didn’t save the receipts, you can’t deduct them. With that, you paid more taxes than you should.
4. Your business is not growing.
I know it’s tempting to start changing your life when your business grows, and you see more money coming in. But be patient and change your mindset. Wait for 2 or 3 years to build your company so that you will live the rest of your life the way you want. So, keep living the way you are now, and grow your company first. Spend most of your profit to increase. Use the money to get more clients, improve your processes, hire good people, and build a good team; also, automate your business to enhance efficiency (do more with less). If you do that, your business will grow sustainably. With that, your lifestyle will grow with your company because you will have a reliable company that can give you the lifestyle you want.
So, remember, you and your company are two different things. Thus, you must respect that and separate the money. Again, be patient because it’s better to wait some years to build something and live the rest of your life the way you want than to be rushed and don’t have the life you want.
If you want to grow your company, contact us.
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