When Should I Separate My Business & Personal Finances?

“If you’re looking for the right time to split your business and personal finances, that time was yesterday.”

I often get asked specific timeline questions when it comes to running a business, for example, “when to incorporate” or, “when to charge HST” etc. These types of questions usually have client or business specific answers but the one question that will always get the same answer from me is “when should I separate my business and personal finances?”

Anytime a client asks me this, I always answer with the same response, “from the very beginning.” Even if you’re self-employed, even if your business hasn’t generated any revenue yet, you should open up separate accounts for your business.

I always talk about running a business vs running a hobby. If you don’t create a separate entity, including spending accounts for your business, you’re not embodying the habits of a true CEO. I’ve said it once and will say it again - you can never outperform your identity. So, when you give the excuse that “your business is too small to separate the accounts, or that you don’t make enough money yet, or that this finance stuff is too complicated and overwhelming or that it can wait” - guess what identity is running your business? You need to legitimize your business by stopping yourself from using your personal accounts for everything. When you keep a dependency on using your personal accounts you never fully embody a CEO mindset or identity.

Client Story: Amanda & Dan

Amanda and Dan owned a five unit investment property downtown Toronto which they managed and ran as their side business The income on that investment along with the expenses went in and out of their personal bank accounts. Since they didn’t track the business finances separately, they believed the property wasn’t profitable and that they had made a bad investment. When they reached out to me for guidance, the first thing we worked on together was separating their business and personal accounts. That’s when they realized the property was actually earning them a profit of $1,000 per month which was being used to fund the family’s lifestyle without them realizing because it was commingled in their personal accounts. And because they didn’t know the property was generating an income they were actually going into unnecessary debt for repairs and other expenses on the property.

Separating your business and personal finances allows you to clearly see how your business is performing.

If everything is going into and coming out of the same pot, how will you know what business decisions are healthy for the growth of your business and which ones aren’t. You also have a better idea of how much money you have available to reinvest back into your business. And probably the most important, it reduces the stress, time and money when preparing your financial statements for tax time.

If you have no idea what your business finances are, what’s the level of decision making you're doing for the future of your business?