You might think, “Finances are finances, right?” Wrong, there are a lot of differences between your personal finances and the finances of your business. Personal finance is everything you do for your personal accounts such as budgeting and investing. While business finances cover expenses of raw materials, cash flow, and more for your business.
So what are the differences between the two?
Leverage. This refers to how a business acquires new assets for startup or expansion. If you read any articles that discuss the differences between personal and business finance, most will tell you leverage is the number one difference. At some point in time, a business is going to have to leverage, which is a technique that can be used to grow gains or multiply losses depending on if the leverage was successful. Meaning leverage for a business is needed while leveraging personal assets is not a good idea. The reason you should not use leverage for personal use is that if you lose, you can lose everything from your car to even your home.
Cash Flow. This is another big difference between the two types of finances since more than likely you don’t need to keep a lot of cash on hand. Yes, you should have extra money saved up to cover emergency expenses such as flat tires, but a business needs to keep a much more detailed budget and cash flow. Having money on hand when bills are due is crucial to surviving as a business, so make sure you are maintaining positive cash flow to stay in business.
Here at TSB, we understand the importance of keeping your personal finances and business’ finances separate. We offer business checking and savings accounts so that you have access to your cash flow when you need it most. We also can help you learn how to properly leverage your assets to grow your business because we want to give you the necessary tools to be successful!
Why keep them separate?
- Better record-keeping which will help identify items you are overspending on.
- More protection on personal liability, especially if you have your business as an official LLC.
- Builds credit for your business to eventually leverage and grow.
- Easier to fill out taxes when not everything is combined in one account.
To read more about the differences between your business and personal accounts, check out our article on Personal Credit vs. Business Credit.
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