Are you Running a Business or a Hobby?
You’re committed to the success of your small business right? So let’s think about what makes a business a business. Think of how a big company runs things. They have a business bank account and business credit cards, they keep records of all business expenses and sales, and they know when they have made a profit and how much.
Do you run your business like this? If the answer is no, then you don’t actually have a business. You’re merely engaging in a hobby, and it may be an expensive one. You might be saying, “But I’m not an accountant.” True. However, as challenging as it may seem initially, you can absolutely learn to keep proper track of your business finances. It is critical to your success as a small business owner.
The absolute most important thing to do is to separate all your personal income and expenses from your business income and expenses. You would never see the CEO of a big company go out and buy printing supplies from his or her personal account and you shouldn’t do this either. This means you need to have a separate bank account for your business. If you don’t, then all your income and expenses are mixed together and it’s far harder to keep track of everything. (It is easiest for network marketers and other home based entrepreneurs to fall into this trap.)
Once you’ve established separate accounts, place any personal earnings (if you still have a “day job,” any financial gifts, alimony, etc.) in your personal account and put your business earnings in your business bank account. Likewise, pay for all of your personal expenses (rent, groceries, clothes, vacations, etc.) out of your personal account and all of your business expenses (supplies, equipment, salaries, etc.) from your business account.
This is simple, but not necessarily easy. It may require a shift from how you’re accustomed to doing things now. Newer entrepreneurs may be saying, “STOP! I haven’t yet created success with my small business. I don’t make enough money from my business to pay for all of my business expenses.” If this is the case, simply make loans as necessary from your personal account to your business account and be sure to keep records of those loans. When your business becomes profitable, it can pay you back.
You should also have a separate business credit card. Charge personal items to your personal credit card (and hopefully pay off the balance every month) and charge business expenses to the card that you’ve designated as your business credit card. This way, if you’re carrying a balance on your business credit card, then the interest will be tax deductible. This isn’t possible if there’s even one personal expense on the card.
Now, what about those expenses that cross the line – a portion is personal and the rest business? An example might be your automobile expenses or some of your household expenses if you work from home. For these items, I suggest paying for them from your personal account BUT keep very clear records. Have a small book or log in your car to record business mileage. Keep all your household bills (mortgage/rent, phone, utilities, etc.) filed away so that you can use them at tax time to determine what percentage you are able to write off as a business expense.
There are three reasons why it’s important to follow these suggestions:
1. If you don’t treat your business as a business, you’ll never make a business income.
2. If you don’t keep appropriate records and you’re audited, the IRS may classify your business as a hobby. This could mean loss of tax deductions and potential penalties.
3. You’ll be easily able to track your progress towards success in your small business, determining when you’ve become profitable. This allows you to make any necessary adjustments and corrections along the way.
Have faith in yourself. You can do this. Visit http://www.AbundanceBoundSystem.com for all the step by step guidance you need to ensure you are laying the proper foundation that will support your success and allow your small business to thrive.
2 Comments
Other Links to this Post
RSS feed for comments on this post. TrackBack URI
By Mike Harmon, September 15, 2009 @ 12:30 pm
I found your site on Google and read a few of your other entires. Nice Stuff. I’m looking forward to reading more from you.
By Teemaree, December 28, 2009 @ 5:39 pm
Although I had heard of some of these steps before, never so clearly and put together! Thank you, I have been struggling with this for some time. I’m going to make these clarifications right away!