Small business owners (particularly one-man operations) may not see the need to separate their business and personal finances.
During the early stages of the business, small business owners will typically think nothing of using their personal accounts for business transactions e.g. paying suppliers. By the same token, income generated by the business is sometimes also regarded as personal income, and little or no effort is made to distinguish between personal and business expenses.
Whilst it may seem like an easy and convenient solution to merge one’s personal and business finances, it is not in the best interests of the business in the long term. Small business owners will not have a clear picture of the financial status of the business, lacking even basic information on income and expenses. This in turn negatively impacts on the small business owner’s ability to manage cash flow, and to make strategic decisions around pricing, costs and other key elements of the business’ profit model.
It also makes it difficult for the small business owner to provide interested parties (e.g. the South African Revenue Service, potential funders) with accurate information on the business’ finances.
Access to the personal account for business-related deposits and withdrawals is likely to be restricted to the small business owner as there are trust and confidentially issues associated with allowing employees to have access to if business and personal finances are merged. This means all financial transactions must be executed by the small business owner, adding another task to the to-do list that could potentially be delegated to an employee.
To create order and boundaries in their lives, small business owners can open a separate banking account for their small business (including a business credit card), and keep separate financial records. The major banks in South Africa have offerings specifically for small businesses, and small business owners can select their preferred option based on comparisons of fees and types of transactions included.
Small business owners can easily upgrade or downgrade their account, or switch to a different bank if their needs are not being met. Small business owners should also be clear about which expenses are business-related and which ones are personal, and pay for these expenses using the appropriate account (or keep track of business use where infrastructure and equipment are used for both business and personal purposes).