If you are in the process of setting up your own business, or have recently launched one, you probably wrestled with the idea of whether you should separate your personal and business bank accounts.
Depending on how your business is structured, you might not have had any choice in the matter. As you are legally required to, if you operate as a company, trust or partnership in Australia. Mainly for the purposes of tax.
However, if you are a sole trader, this obligation is not imposed upon you by the Australian Tax Office.
That said, an important aspect of running a business is to keep accurate financial records – not least because you must submit end of financial year tax returns every year.
So, for this reason, you should consider simplifying your processes by running separate bank accounts for both your business and personal use. Particularly if you have plans to expand the profitability of your business.
Need a bit more convincing? Well, here are 7 things to consider.
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1. It gives your business a more professional image
For any business, it is important to convey a professional image. After all, you want your customers to be confident that they are purchasing goods or services from a genuine company, who will be able to supply them with what they need.
This is particularly pertinent if your business operates on a full or part payment upfront basis. Customers could well be put off if they see your personal bank details on an invoice.
Therefore, a crucial step in being taken seriously is to ensure all payments from, and to you, come from a business bank account.
Not only will this make you look more trustworthy in the eyes of your customers, but given that your business name will appear on the invoice, it also helps your customers to remember your brand name too.
2. Better awareness of the financial state of your business
As a new business, one of your biggest challenges will be the way you can manage your cash flow.
How you keep track of your spending is critical for the development of your business. Especially when it comes to paying bills, recompensing yourself, and planning future activities like marketing campaigns, buying stock and developing new product lines.
If you don’t have a separate business bank account, you are making it more difficult for yourself to do this. You also run the risk of overspending if you misjudge how much you have in the way of available funds.
In addition, if your business and personal account is combined it will take you longer to sort out the actual financial state of your business. As you will need to detach costs associated between the two. This in turn will leave you with less time to focus on other aspects of your business that might bring in more profit.
3. Best Practice
When you launch a new business, you obviously want it to be profitable and prosperous. One of the ways to put your business on the path for success is to follow best practices.
This should transcend all aspects of your business and not just certain parts of it, as this philosophy should be indicative of the boom culture you are trying to build.
Although you might perceive it as a small thing, not adopting the best practice of having a separate account for business and personal use, could be representative of a slip in standards.
So, it’s best to start as you mean to go on and do things properly.
4. Easier accounting
All businesses need to submit tax returns.
When this time of the year comes around, you will want to make sure you do not miss out on any tax deductions your business is legitimately entitled to.
Keeping both your business and personal expenses and transactions detached will not only make the process of submitting your tax return easier, but it will also ensure you do not mistakenly claim a personal expense as a business one.
In turn, as they will not have to analyse all your personal expenses in order to prepare your tax return, you will also most likely reduce your accountancy fees. Especially if your accountant is being paid by the hour.
To further streamline your bookkeeping, it is also a good idea to link your business account to a business accounting software package. This will automate the process of keeping track of your expenses, thus saving you even more time to focus on other parts of your business.
5. The ATO might get suspicious
One major advantage to having a separate business account is that the ATO tends to trust that more.
If you produce tax records from an account that mixes personal, and business use, you should be prepared for much closer scrutiny from them.
After all, even if you have provided them a completely accurate reflection of your business’s financials for the year, they don’t know for sure that you did. And thus, probe further into all your transactions – which you will have to explain.
For the sheer hassle this can cause, it is much better, thus, to have separate accounts for your business and personal use.
6. Separated funds ready for tax time
Unfortunately, all successful businesses must pay tax. Whilst this is not something to look forward to, it is something you can prepare for.
By maintaining a separate business bank account, you will be able to keep track of all your incomings, which in turn will help you to better meet your tax obligations at the end of the financial year.
To ensure they are not hit with a hefty tax bill at the end of the year, something many sole trading business owners do is to set up three separate business accounts.
One account is for everyday expenses, another is for keeping your GST and PAYG payments and a third is for holding your profit.
It requires a bit of discipline, but the beauty of doing this is that you should have better control over your cash flow simply by not spending more money than you have available to you.
7. There are some benefits
Having your own business account comes with some benefits. This includes access to some financial services like business loans and overdrafts.
Should your business be in a position where you need an injection of cash – whether it be for temporary cash flow or to fund growth – having this type of account could provide you with opportunities you wouldn’t otherwise have.
We hope this article has highlighted the importance of separating your business and personal bank accounts.
Having read it, if you are currently processing all business transactions through your personal account and would like to open up a new business account, you might want to check out this guide from Westpac re: changing banks for your business banking.