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An essential part of running a business is staying on top of your business finances. Not only does this help when submitting your company accounts, but it also increases the likelihood of your operation succeeding.  

To keep things simple, it’s important to keep your personal and business finances entirely separate. This reduces the risk of confusion and gives you a clearer picture of how your business is performing.

Eight ways to separate your personal and business finances

Follow these eight top tips for keeping your personal and business finances separate:

1. Open separate bank accounts

As a first step, you should open a business bank account for all your business spending and expenses. Doing so makes it easier to differentiate between your business spending and your personal spending.

Even though sole traders and partnerships may be able to use a personal bank account for business purposes, there are several advantages to opening a dedicated business account. Many business bank accounts work with accountancy software, which can streamline invoicing and tax. Many also include features such as business support, which can benefit your company.

You could even consider opening multiple business bank accounts and using them for different purposes. You might have one for future tax payments, for instance, another for collecting income, and another for dealing in different currencies. 

2. Track your expenses

Having a separate business bank account can assist you with tracking expenses and help you maintain a spotless financial record. But things can become more complicated if you have shared personal and business expenses. 

For instance, you might use your personal car for business-related purposes, or you might run your business from home, in which case a proportion of your energy costs are for work purposes.

Because you may be able to deduct some of these business costs from your profits to reduce your tax bill, it’s crucial to keep accurate records of these expenses and keep hold of all your receipts to prevent a financial headache later on.

3. Pay yourself a salary

As a business owner, you should pay yourself a salary each month by transferring cash from your business account to your personal account. This can make it easier to stay within your budget as it prevents you from dipping into your business account whenever personal costs arise.

Businesses structured as sole traders or partnerships can set up standing orders to transfer a set amount into your personal account each month. If you’re a limited company, you must pay your salary through PAYE. 

4. Get a business credit card

Applying for a business credit card makes it easier for you to track business expenses. Relying on your personal credit card for business purposes can quickly cause confusion. 

A business credit card can be useful if unexpected expenses occur, and it can also enable you to build a business credit rating. In addition, you can often give business credit cards to employees to cover business expenses, which you can then easily monitor and track.

5. Get a business loan

Borrowing through a loan can give you the funds you need to help your business expand, buy new equipment and invest in new premises. 

Although some lenders allow you to use a personal loan for business purposes, it’s often better to use a business loan to keep your finances separate. 

If you’re operating as a limited company, borrowing through a business loan enables you to build business credit. It also means you won’t be personally liable for the loan repayments if your business can’t meet them, which isn’t the case if you take out a personal loan. By using a business loan, your personal credit score remains unaffected. 

This doesn’t apply to sole traders. The law regards you and your business as a single, indivisible entity, meaning you remain personally liable for any debts. It’s a similar situation in a partnership, although in this case responsibility for the debt is split between business partners. 

Read more: 

• Business loans vs personal loans

• Business structure types 

6. Set a budget

Setting a strict budget for your business based on your current earnings can reduce the chances of you dipping into your personal funds whenever your business faces a shortfall. This can prevent the lines between personal and business expenditure from becoming blurred.

7. Don’t use business funds to pay for personal expenses

Just as you should avoid using personal funds to cover business shortfalls, you should resist the urge to dip into your business funds to pay for personal expenses, even if you are the sole owner of your company. 

8. Seek financial advice

Finally, it can be a good idea to speak to a financial adviser or accountant. This can prevent you from making mistakes in your tax returns and accounts. It also helps ensure you’re following the rules and can even uncover new ways to manage your business finances.

Why is it important to separate personal and business finances? 

It’s important to set a clear boundary between your personal and business finances to enable you to track your business’s performance and avoid any potential conflict between your personal interests and those of your business. In some cases, it can even prevent you from becoming personally responsible for your business debts. 

Keeping your personal and business finances separate prevents accounts from becoming muddled. This means that when you come to file your tax return, you can find and track everything easily, speeding up the whole process and reducing the risk of making costly mistakes.