When you start a small business, the extra cash can be exciting and burn a hole in your pocket but it is important that you consider the cash flow implications of spending too much!
A common issue that we find here at Hatch HQ is when our clients forget the importance of keeping their business and personal expenses separate. This can cause issues with cash flow for the business with a lack of control in expenditure and the risk of you drawing more personal funds than the business can actually afford to give you. This issue applies for both Sole Trader Businesses and Limited Companies and can leave the business short of cash to pay their liabilities and can even cause a business to fail.
Keeping your business and personal expenses separate is actually pretty easy! With lots of free business bank accounts around nowadays that you can sign up for online, there really is no excuse to keep your business money in your personal account anymore. Keeping a separate bank account purely for the business income to come in to and business expenditure to come out of is easier to manage from a paperwork point of view, with less transactions for you to work out at the end of the year and less head-scratching about whether that particular cost was for the business or not. Lots of bank accounts now also let you snap and save your receipts against transactions, making it even easier to keep track.
Of course, you still need to take money from your business and this can be done by transferring money to your personal account for you to spend as you wish. This also increases your privacy as your accountant only needs to see your business bank statements and therefore won't be seeing so much information about what you spend your money on personally!
The steps to keeping your expenses separate really couldn't be simpler- a bank account purely for the business and transfer to your personal account any money you want to spend on your own stuff!
If you aren't sure of what counts as a business expense, remember the "wholly and exclusively" rule! If you need the item purely for the running of your business and you won't use it personally, the chances are it can be claimed as a business expense!
