The biggest danger of this confusion is not knowing the exact result that the business generates. The number of entrepreneurs with difficulty in keeping financial commitments up to date has grown. Many who are in default may have made mistakes like mixing personal finances with business cash. The procedure is common among micro and small business owners.
When the entrepreneur does not separate the physical from the legal account, he loses financial control of the business. He does not know how much he has to pay suppliers, employees and other expenses or how much he could reinvest in the business. Furthermore, he is unable to read the correct costs and revenues, which can lead him to determine an unrealistic selling price.
1. Make a financial diagnosis
The first step for your financial organization is to know the real profit of your business per month and how much you spend on personal expenses. For this, the tip is to build two tables, individualizing the company’s expenses in one and in the other your personal expenses. Don’t forget to include all expenses, from children’s school to your company’s accountant fees.
2. Define your withdrawals
The company’s profit cannot be confused with its profit as an entrepreneur. It has several purposes, such as making investments, reserving working capital and paying all employees.
Your salary, also called pro-labore, must be fair and appropriate to the reality of your business. Thus, you must set a salary based on your company’s financial situation. It is necessary to stipulate an amount that you can pay without compromising the other obligations of the company.
3. Have separate bank accounts
Ideally, you should have separate checking accounts, one for you and one for your company. Although some entrepreneurs manage to manage the finances with just one, with separate accounts it is easier to have a good financial organization.
Thus, you will be able to better control entries in statements, payments received and expenses incurred. Another advantage is the ease for you to prove your billing, which makes it simpler to file your income tax return.
4. Adopt corporate plans
Using the legal entity of the company it is possible to hire essential services for your business with plans much cheaper than those available to individuals. There are corporate plans for cell phones, telephones, internet and even differentiated credit lines for companies. In addition, you must be familiar with the services offered by your bank, in order to enjoy the best benefits.
5. Seek help
If you don’t feel safe doing a financial check yourself, hire a trusted employee to do it or invest in technology. There are some options for cash flow management software and also for applications that enable effective control of expenses. Another way out is to seek courses in finance and cash flow.