Why you shouldn’t use business accounts for personal expenses

When we published our piece on how many bank accounts your business should have, we were surprised to see how many Aussies were puzzled by this basic business bookkeeping tip.

So, it might be interesting to know our best-practice advice around managing business and personal bank accounts as well.

In short: they should always be separate. Of course, as a sole trader, you may not be required by law to have a separate business bank account (check ASIC for more), but it’s certainly worthwhile doing anyway. Here’s why.

Less visibility for long-term planning

In our cash flow forecasting series, we explained that not being able to plan is planning to fail, and for bullet-proofing your business finances, being able to use the past to see ahead is everything. 

When you blur business money matters with daily, everyday personal expenses, it can become very difficult to make sense between the two. So trust us, unless you’re logging everything down in a small business expense spreadsheet, you’ll quickly forget what you spent your money on (especially when the trading name appears in your banking under an obscure reference). 

Here are just some examples of personal expenses you can’t claim (but may be claiming unintentionally):

• Housing
• Dining and groceries
• Gym memberships
• Personal toiletries
• Medical
• Transportation
• Credit card debt
• Home decor
• Childcare and school costs
• Streaming packages and entertainment
• Utilities

Take, for example, that Officeworks receipt that was for school books but you retrospectively assumed was office stationary – or that BSB transfer from a friend for concert tickets that you noted as income. 

Maybe you skimmed that car repayment on your statement, and mistakenly logged it down as a fuel expense, or noted that Amazon deduction as something equipment-related (when really it was dog food)?

The trouble with keeping everything jumbled on the one statement is less visibility for long-term planning. You’ll make it unnecessarily hard to audit expenses, identify any costing issues and comb back through deductions and income to measure performance. 

Plus, if you get audited by the ATO, the penalties can be severe.

It can come across as unprofessional

As a business owner, professional conduct is key – and image and perception are a huge part of that. 

After all the work to create a sale – the customer research, marketing spend, five-star service, managing the paper trail of a normal quote, and finally getting them to sign on the dotted line – imagine losing everything at the final hurdle?

Customers often don’t like paying into personal bank accounts, and for a couple of reasons. 

The first is that it can feel illegitimate, with the perception that they would have an increased likelihood of being scammed, and the second is that personal payments can be harder to retrieve from banking authorities in the case of an issue down the track, like a return. 

On the whole, customers tend to avoid paying into personal accounts, so if you’re asking a paying client to make a transfer through a personal BSB and account number, be prepared that you might run into a bit of hesitation. 

Our best basic business bookkeeping tip to combat this is simply to set up a separate account for business income. Everything that comes into and goes from that account is business-related, and if you use a website to take payment, you can easily set up a point-of-sale plugin to make it even more seamless (and safer) for your customer.

Insurance, bank and stakeholder problems

If you’re in the growth stage of your business, you’ll probably have graduated from the days of managing everything in a small business expense spreadsheet, and instead sit firmly in the realms of bigger decisions.

Things like raising venture capital, researching more in-depth insurance policies and pursuing a credit facility with the benefits and structure to match your needs – these are exciting milestones.

However, it’s also important to graduate from the one-size-fits-all personal bank account solution, too. Here are the three biggest reasons why.

• Insurers: Some insurers will hesitate to provide personal liability or professional indemnity insurance to business owners who do not have a clear fiscal structure or operational setup, especially if the insurer deems the business owner to have intentionally misrepresented funds. Obviously, this isn’t always the case but it becomes much harder to prove accidental misappropriation when personal and business expenditure is so tightly coiled.

• Investors: – When there aren’t clear financial breakdowns of income and spending in a clean book sheet, investors will find it difficult to do their due diligence – and in most cases, they’ll run a mile. Plus, they might question why you spend the sort of cash you do on personal expenses, and technically this should be private to you.

• Bank: – Banks often charge different fees for personal and business use accounts given they offer the holder different options and perks. A credit facility will be hesitant to open up a large credit pool to an applicant who has confusing expenditures, where it might signal that their repayment potentially would be just as muddled.

It’s a bookkeeping headache, making tax returns painful

Here at Dollars + Sense, we’re well-versed in both basic business bookkeeping matters, and clients with more complex needs – but one surefire way to turn something that should be simple into the latter is commingling accounts.

Because of the way historical records show up (under obscure reference names), there can be a lot of work for a bookkeeper to try and understand what a purchase was for and how to categorise it. Mix this in with matching receipts dates to items to ensure they’re being logged legitimately, and this additional manual step takes away from valuable time we can give you in planning for the future. 

Even still, this is our jam. So, whether you’re knee-deep in the mess of jumbled accounts, or simply want to get some advice on separating them for the future, we can help. Our dedicated team can create clarity out of chaos and set you up for future success.

Other best-practice habits for separating your financials

Aside from separating your business and personal accounts, remember to follow these basic business bookkeeping tips to boost your financial productivity. 

• Separate emergency fund accounts – Use your business bank account for actual business expenses only, and maintain a separate emergency savings account in case you need to draw cash for personal use (without dipping into the business kitty).
• Draw a salary – Establish a clear salary or owner’s draw structure every week, fortnight or month, so you have consistency and transparency in how money is being moved. You absolutely should be paid an income from your business, but the extra benefit is that the consistency is a good sign to investors and authorities that there’s no misappropriation going on.
• Create regular transfers for personal use – Instead of confusing, randomly timed withdrawals, set up regular transfers from the business account to your personal account for personal expenses. Again, pulling extra cash from the business can be necessary, but it’s always important to show intention and consistency behind how it’s done.