If you gradually moved into self-employment, by doing freelance projects in your own time while you were employed by a company, you may have ended up with a blended bank account – one account that receives deposits from both your salaried job and freelance exploits. It’s easy to see how this occurs, because there often isn’t a cut-off line between being employed and becoming self-employed.
However, if you want to keep doing side-gigs to bump up the family income or you plan to eventually become totally self-employed, separating your personal and business finances is a must.
Six reasons to separate business and personal banking
Tax calculations are easier
If you use one account to receive business income and pay expenses, accounting is straightforward. The alternative is going through every line of your personal bank statements looking for business-related transactions. If you miss something it could come back to bite you as tax avoidance (undeclared income) or a missed opportunity (unclaimed business expenses).
Bookkeeping is easier
Bookkeeping requires you to record every financial transaction related to your business, i.e. every deposit and payment needs to be coded and reconciled. This is obviously much easier if you have a banking set-up that’s exclusively for business activity.
Easy linking to accounting platforms
The gold standard for accounting is having your business banking connected to an online accounting solution, like Xero or Afirmo. If you don’t have a separate account, the coding and reconciliations required by online accounting will be complicated by all your personal transactions.
You get a view of how well your business is doing
A daily peep at your business accounts gives you a snapshot of your current financial position. It also makes it easier to check that clients are paying you on time.
You look credible and professional
Having a separate business account is part of looking like the real deal, which is important for maintaining credibility with customers and suppliers. It also sends a message to you that your business is no longer a side gig or hobby; it’s an entity to be taken seriously.
You can pay yourself a salary
You’re in business to generate income that allows you to live, so money will be leaving your business account to pay for things you need personally – like food, rent or home loan, utilities and clothing. Instead of paying for these things directly from your business account, it’s best to pay yourself a salary into your personal account. Otherwise you’ll have to code each of the personal transactions as ‘drawings’.
Bank accounts for business
If the bank you use for your personal finances offers business banking, talk to them about what you need for your business. It’s convenient if your personal and business banking are with the same establishment, because you’ll have online banking that shows all your accounts in one view. You can also easily move money from your business account to your personal account, to pay yourself a salary.
Before you commit to opening a business account, check that the fees are reasonable. Some banks offer small business banking packages with low fee structures. You might also be offered special benefits for business banking customers, like free webinars, free-to-use hot-desking spaces and bookable meeting rooms.
Business transaction account
The heart and hub of your business-related banking is a transactional account that’s accessed through internet banking. For optimum usability, it should come with an EFTPOS card and be able to easily link to accounting platforms, like Xero, MYOB and Afirmo. If your income has significant seasonal ups and downs, you might want an overdraft on this account for emergencies.
Business savings or tax account
Having a separate, interest-earning savings account for your business gives you a place to stash tax money until you need it, removing the temptation to spend money that isn’t really yours. If you can get into the habit of putting money aside for end-of-year or provisional tax payments and GST (if you’re registered for GST), there will be no palpitations when it’s time to make a tax payment.
Business credit card
This is optional, of course, but useful for buying business materials or supplies online. It’s also handy for paying for work-related travel and entertainment. You could make it a debit card, to remove the temptation of spending up on credit. Best practice is to have your business or credit card visible in your online banking.
Business loan
If you need a loan for a vehicle or equipment to get your business booming, it’s best to make it a stand-alone loan that’s not tied up with your personal finances. For example, adding $25k to your home loan to fund your business idea is going to get complicated when end-of-year accounting time rolls around. The big banks offer easy asset financing, where the loan is secured against the value of the asset. You can also release capital into your business by using equipment you already own as security.
Contactless payments
If you’d like to get paid on-the-spot for services or products, an EFTPOS terminal (fixed or mobile) could be the way to go. All the major banks offer set-ups for accepting EFTPOS, debit and credit cards. Your customers can swipe, insert or tap a card to make payments directly to your business account.
Term investment
If business is going well and you have spare money that doesn’t need to live in your everyday transaction account, you can direct some into a term investment to earn a higher rate of interest.
Get set up for success
However you decide to structure your business banking, joining Afirmo is going to help you stay in control. Designed to support sole-traders, freelancers and small businesses, Afirmo is an online suite of tools that will help you to set up, smarten up and stay on the path to success.
Check out Afirmo’s suite of Smarten Up tools:
- Sales Tool: A professional sales invoice shows you mean business. Add your logo and get that professional image in an instant.
- Marketing Toolkit: The Marketing Tools allows you to create a new brand, get a logo and cool domain name and get online in an instant.
- Money Tools: Securely link your bank accounts to Afirmo and see your business performance and insights presented. When you categorise your transactions and match them to your business expenses and sales invoices with Afirmo you well get a complete picture of your business.
- Tax Software Tool: Afirmo’s Tax Tool makes calculating your GST and Income tax bills a breeze. Afirmo’s tax tool is suitable for sole traders, Partnerships and Limited Liability Companies.
