Why it's vital to keep business and personal finances separate

0:00 Ralph: Are your personal and business finances completely intertwined. Do you find it hard to distinguish between the two we'll stay tuned today? Friends, because I'm gonna talk to you about why separating your personal and business. Finances is crucial, actually. It's vital.

0:45 Welcome back to the show today on this personal finance Friday, where we try to delve deep into a personal finance topic today, we're going to merge the business and personal realms. today we're talking about a topic that is near and dear to my heart. And that's the importance of keeping your personal and business finances completely separate. This is about the biggest nightmare for an accountant. Whether you run a small side business or a large corporation. Mixing personal and business. Finances is a recipe for disaster. I've seen it time and time again with clients and friends who end up in a financial mess because they didn't respect this crucial boundary. So in today's episode, I want to clearly explain the dangers of mixed finances, the benefits of separating them and actionable steps you can take to divide your money.

1:35 I always bring the action items. My goal today is to empower you to make wise financial decisions. That honor God. At the same time, stewarding your business resources ethically. Well it's a quiet and cool morning here on the farm today, the sun is shining brightly and a promise of a new day is dawning with a beautiful sunrise. Now don't forget. Before we get started to subscribe to our show, you can join our email list. You can do that at askralphpodcast.com. So you don't miss tomorrow show. Now tomorrow, show's going to be special. I'm going to replay my appearance on Dr. Christopher Loo's show. We talk all things, financial, we had a great back and forth, and it's something I really encourage you to listen to.

2:16 Now, one of the things I'm going to start. Is every day, I'm going to talk about a relevant Bible verse to the topic we're talking about. So today's Bible verse comes from the book of Luke. Chapter 14 verses 28 and 30. And it goes like this. Suppose one of you wants to build a tower. won't you first sit down and estimate the cost to see if you have enough money to complete it. For if you lay the foundation and are not able to finish it. Everyone who sees it will ridicule you saying. This person began to build and wasn't able to finish. This passage emphasizes the importance of counting the cost and having enough resources before starting a major product. This might not sound directly related about business finances.

2:57 The principle applies. It teaches that one should plan carefully and separate business funds from personal funds so that a failed business endeavor does not also ruin your personal finances. Building on a solid foundation is wise. So let's get to the core today's episode and that's the danger of mixed finances. Let's start by looking at some of the biggest dangers of combining personal and business finances first. And this one is crucial, becomes extremely difficult to track where the money is coming and going. The truth is folks without clear records and boundaries, you may end up accidentally spending business money on personal expenses and vice versa. So what we call in the trade commingling.

3:39 Co-mingled finances are the perfect environment for money leaks that drain your resources quickly. Another major risk is legal liability. Now I'm not an attorney. So don't take this as giving you legal advice, but if your business is sued or has a financial problem. Your personal assets are on the line when the finances are mixed together. So what we call commingling, you want to keep those things separate. What does that mean, Ralph? What means this again? In my non-legal opinion, creditors can seize your house. Your cars and other personal property to settle business that seeks or things you've worked hard for to acquire with your hard work and effort. Separate finances protect your personal assets.

4:19 Mixing finance also enables fraudulent spending. How do you say that happens, Ralph? Here's how it happens. Employees may abuse company credit cards or write checks, knowing that oversight is lacking, thisI that you are not paying good attention to keeping things separate. They may use that to their advantage. And it also enables lifestyle spending where you lose track of reasonable business expenses versus personal splurges . I see this. Constantly in my practice, these personal splurges. They get out of hand when you don't keep things separate. And finally, this is the one that I want to talk about the most and that's commingled money makes filing taxes a headache.

5:00 And trust me folks. It does when I've got to sit down with a client and go through, okay, what is this? Is this personal? Is this business? Oh, next one. Is this personal or business? And this is an absolute truth. Accountants will have a terrible time sorting business versus personal activity. And the legal and financial risk associated with incorrectly filing business or personal tax returns is massive. In my personal view, this also is a huge audit risk. And let me explain why. When I have a client that gets audited, the best records I can give are when I'm able to say to the IRS auditor, here we go. IRS auditor here are their personal banking records and their personal credit cards. And here are their business banking records and business credit cards, because the worst case scenario is when you have an IRS agent dig into the business finances and they start to find personal expenses.

5:51 Then all of a sudden, it's very difficult to explain to them how these things are not personal and vice versa. So I truly believe this is a huge audit risk. So for no other reason, To keep your items separate this, is a huge one to avoid that audit risk and simply put the dangerous are massive. And plentiful when you mix personal and business money, it's a recipe for financial disaster. And truth is folks. It puts your family's livelihood at risk. No matter what. Resist the temptation to cut corners and make excuses. Now let's talk about some benefits of separation. I gave you the sad side of that. Let's talk about some positive things.

6:31 Because there are many benefits. Of maintaining completely separate finance. First of all, it enables proper income and expense tracking for your business. So you can actually look at your business and see how it's performing. I say this time and time again, what gets measured gets done. If you keep your finances separate, then you can look at your business records objectively and you can say to yourself, Hey. This is accurate with clear separation, you can run accurate financial reports. Identifying opportunities to control spending and make strategic decisions. If they're all mixed together, personal and business, how can you ever make a wise decision? Good. Financial control is impossible with mixed budgets.

7:13 Trust me, I deal with this every day. If you don't break out your business and personal expenses, it's very hard to analyze that. Another thing, we alluded to this a few moments ago. Separation also protects your personal assets. As I mentioned earlier. Business legal liabilities have no way of touching your personal wealth when finances are separated. Again, I am not an attorney. I don't play one on television. I don't pretend like I'm an attorney. But this is just common sense. If you want to know more specifics about that, then consult with an attorney. And as I discussed, another benefit is tax optimization. With clear expense reporting, you can maximize business tax deductions and organize personal finance to minimize tax liability.

7:56 If your records are clear. Than somebody that's a professional like me can help you mitigate your tax costs. And this is a huge one folks. It avoids any appearance of inappropriate deductions when you file taxes. As I said, when you have that unlucky winner of the audit lottery and the IRS decides to bring you in and talk over your finances, if you can clearly show that you have personal records and business records, this will be worth its weight in gold. Maintaining separate finance also improves your chances of getting a business loan or line of credit. We might say, Ralph, how's that possible? Lenders want to see that you keep careful financial records and manage business money wisely.

8:37 And separating business and personal money enable smarter life decisions. If the lender sees that you honor those things, you keep things separate. You're able to present them with a profit and loss statement with a balance sheet on the business. And it's not all kinds of mixed up together because a lot of times lenders are going to say to you, Hey, simply give me a copy of your profit and loss statement. I've had clients do this. They send it over to the bank and here's all these expenses. And the banker says, wait a minute, guy. Why are all these personal expenses on there? Oh yeah. I got to clean that up. Guess what? The lender is less likely to give you that loan. For example. You might realize that your business is barely profitable. And using personal income to stay afloat. You're sending good money after bad.

9:18 If you don't have things separate, you'll know better to figure it out. And that insight may lead you to make needed changes, or you may learn that your personal spending is out of control. Look at your business, finances through a critical lens. If you don't keep those separate. You might think your business is doing poorly. When it could very well be as it's, you're spending all the business money on personal things. So let's talk about some actionable steps. So now that we explored the dangers of mixed finances and the clear benefits of separation, I hope there are clear. And I feel like they're clear, let's discuss some actionable steps you can take to implement and divide your money first. And this one is key. Open completely separate banking and credit accounts. This includes business checking and savings accounts, a business credit card, merchant services, lending accounts, and more.

10:04 It's very easy to not do this. It's very simple to just have one bank account and trust me, folks, I have clients that do this every day, and I say to them, stop doing this open up separate accounts. Even if you're going to use the same bank. Open up separate business and personal accounts. It just makes life simpler. And never co-mingle money in one account. It is a recipe for disaster. You can't measure it. It's a huge audit risk and it may pose some personal liability as well. Now, secondly, use bookkeeping software or work with an accountant like myself to record all transactions in the proper categories. Now, this is an opportunity for me to send you to my website.

10:45 That's askralphpodcast.com/store. If you'd like to set up a one-on-one meeting with me. I can help you put together a plan to better keep track of your business and personal finances. You can click right on that and you can schedule a meeting with me. It doesn't matter where you are in a world. Zoom has opened up the doors to this. I will work with you individually to help you do this. Personal expenses should never show up in business financial reports and vice versa. That's a big no-no. So thirdly, you want to develop processes and policies to ensure money is coded correctly. I, what does that mean? That sounds like a big word. Ralph well. It is, but it's not that complex. For example. Require receipts for all credit card and check purchases.

11:28 This is one of those things that can help you avoid fraud. and also set up approval processes for larger expenses. Don't allow employees to self approve their spending. These things go without saying. But if you've got separate business and personal accounts, Then on the business side, you can set up these checks and balances to potentially prevent fraud. And fourthly don't use personal credit cards or checks for business expenses, except if it's an emergency. Now things happen. Sometimes you'll be out and you're like, oh, I got to get this for the business. And maybe you don't have that business credit card or that business debit card or a business check. It's okay to occasionally use personal funds. But here's the deal folks.

12:10 When you do that, make sure to carefully record and get reimbursed to avoid mixing the finances. What does that look like? Ralph? It's pretty simple. Cut a check from the business, reimbursing yourself for that expense and clearly attach the receipt and talk about what that expense was. One of the things that I have clients say to me all the time is you don't get confused, which card to use. And I'm going to tell you a really funny thing I told them to do. Get a black Sharpie and put a B on the business card and a P on the personal card. That way, when you go into your wallet and you see that you've got two cards, pick the right one. What's our fifth step and that's create separate passwords and logins for online banking and accounts. This is a no brainer folks. If you've got a business account.

12:51 And you've got a personal account. Let's say they're both at the same bank. One of the easiest things that you can do. Is set up a separate log-in for each. Which should prevent you from using the wrong account. And here's the key to this. If you've got employees, don't allow employees access to your personal finance. And if they're going into a business account, restrict authority and access appropriately. Let's move on to the sixth action item. And that is review finance reports monthly to confirm that expenses are properly coded and look reasonable. Investigation about anything suspicious, quickly prevents fraud. I don't know how many clients I have that don't look at their bank statements every month. Let's say there's a couple people in their organization.

13:32 It doesn't take hours to do this. Look at your bank statement, look at the canceled checks make sure those checks make sense. I've done many fraud investigations where someone basically took one of the business checks and wrote it to themselves. If the business owner had just looked at. The return checks are known now of course we don't get those return checks as much, but maybe you have to log into the bank account or maybe they're printed on a separate page, or just look at them. You'll find weird things. You can find the same thing with debit or credit transactions. Just skim through them. It may take five or 10 minutes. Number seven work with competent tax professionals to correctly file business and personal tax returns. Don't co-mingle anything during tax time, when clients come in, it's very important that they present me with books that are separate.

14:19 If they've got an S-corporation or an LLC it's even more imperative. 'because then we need to make sure we've got those records separately and that moves on to step number eight and that's consider forming a separate business entity, like an LLC or sub chapter S corporation to establish legal protection between business and personal assets. We've talked about this and again, I'm not an attorney, so consult with legal experts on the best structure for your situation. This can help you really protect your liability. And there are truly some tax structures that I can help you with to improve your tax situation. Number nine, maintain adequate business insurance to protect company assets in case of accidents. Lawsuits or other claims don't rely on personal policies.

15:00 I had a call yesterday from a client he's going to buy a new vehicle for his business. And he said to me, Ralph, listen, I can save. A couple thousand dollars. If I buy it in my personal name. And I said, that's great, but here's the problem. If it's a personal asset and you're using it for business. It could be that the insurance company won't pay a claim. If you have an accident. So I said, is it really worth saving that couple thousand dollars by paying it personally versus doing it the correct way? And he said, you know what, Ralph you're probably right. I hope I'm right. I'm hope I'm giving good information. And number 10. Have the self discipline and integrity to maintain the separation consistently.

15:41 Set the tone. If you've got a business with multiple employees, you can set the tone at the top. With your actions. Don't cut corners for convenience. So those are the top 10 great steps you can take to divide your finances. What does it take? It takes diligence and commitment. But the rewards are massive and it could prevent huge problems with audits fraud. And we'll give you better information to manage your finances. Now, of course, accounting, software and apps make it much easier these days to maintain separate books. So take advantage of the available tools to enforce the boundaries. The last thing you want is a preventable money catastrophe. And I see these every day. Folks, if you can avoid them it's the best thing to do.

16:23 Now, before we wrap up or remind all of our listeners to visit our podcast page. I know I probably mentioned it three times already. But you get the point. askralphpodcast.com . There you can leave us a review, share your thoughts, or even send us a message. There is an icon down on the bottom right and microphone. You can click on that and you can record a message and say, Hey Ralph, talk to me about this, or, Hey Ralph, talk to me about that. I love to hear from our listeners. Tell me what we're doing. Right. Tell me what we're doing wrong and maybe you'll end up on the show. And while you're there, make sure you join our email list and our weekly $25 Amazon gift card drawing. And as I always say, if you're not on the list, you can't win. You can also schedule a consultation, me to, discuss your specific circumstances.

17:03 If you know, someone who is in business or is looking for assistance with their finances, please share this episode with them and share the ask Ralph podcast. This can be a real tool to help them get started. On the right foot. So if you know somebody in business or, you know, somebody thinking about getting into business, Please share this episode with them. Friends that wraps up today's episode on keeping your personal and business finances. Completely separate. I hope you now understand why it's so crucial to avoid co-mingling money. In fact, it's vital. Don't become a statistic. Tragedies happen when we get lazy with financial discipline. Again, visit our podcast page. We got over 300 episodes out there, all kinds of resources and tools to help you on your financial journey towards financial freedom and faithfulness.

17:47 Everything we do aims to help you honor God through wise money management. Remember. When in doubt. Keep your finances separate. Don't let those boundaries blur. God bless you. Richly on your financial journey.