If you're one of the 600,000 entrepreneurs across the U.S. who are starting a new business this year, you're at risk of making one of the most common business mistakes right from the beginning.  

What common—and potentially costly—error is that?  Not separating business and personal money.  

Why is it Important?

Why worry about it?  First of all, there are strict IRS rules about what can be deducted as a business expense and what cannot.  Mixing personal and business expenses (or revenue) is a red flag for auditors.  And since your tax preparer or accountant is ethically obligated to create tax returns with only legitimate deductions, you could not only be putting your business at risk but also creating difficulties for them.

Just as importantly, a new owner needs correct information on what it really costs to do business.  How can you determine if your company is really making money or fix problems in your finances if you are relying on incorrect information?

How to Make it Easier

Several simple habits and methods can help you avoid mixing personal expenses into your business books.  

• Open a business bank account.  Don't wait until you have clients, revenue, or even an office.  Set up a business checking (and possibly savings) account at the same time as you handle legal setup or licensing.  Startup expenses come fast and furious for many new businesses, and the early days can be truly chaotic.  Save yourself time and trouble later by starting off right.
• Use a business credit card.  Modern business credit cards offer more than just convenience and the ability to ensure business purchases stay separate.  They also help categorize and track your expenses easily.
• Know what's a business expense and what isn't.  Rather than try to justify as much as you possibly can or rely on what you've heard, educate yourself about what qualifies as a legitimate business expense.  You may start with resources at the Small Business Administration and the IRS guidelines, but it's best to consult with a professional with experience in small business accounting (such as Teri J Henderson, CPA, P.A.).
• Keep receipts for your business expenses separately.  Even if your system is as simple as the proverbial—or literal—shoebox, you need to keep business receipts in a separate physical location.  Make sure you also have a similar storage place for receipts in your car or any other work locations.  
• Pay yourself a set salary on a regular schedule.  Not only will this help you distinguish between business and home, but it will help you to budget both personally and in your new business.

Managing the financial side of a small business can be daunting.  But with some advance planning and a little organization, it doesn't have to be nearly as painful as it seems.

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