Mixing Personal and Businesses Expenses Is Bad – and How To Fix It
We all know that mixing personal and business expenses is bad. But if you are one of the many business owners pressed for time, you might not understand the consequences of using your company card to pay for the occasional meal or personal item. No harm done right? Wrong.
If you have already mixed your personal and business expenses, this article is for you. We will talk about the reasons that you don’t want to mix personal and business expenses, how to fix this problem if you have already mixed all your expenses together, and what you need to do going forward to make keeping track of your expenses easier.
Why mixing personal and business expenses is bad
1. Inaccurate financial statements
Adding personal expenses into business expenses will inflate the total expenses on your income statement; hence it will indicate a lower than actual net income. You want to have an accurate picture of how much you are spending on a monthly basis and use that data to make business decisions. For example, say you are reassessing your marketing budget for the next three months. You look at your current income statement and it shows that you have been spending more than you made after mixing in your personal expenses. Therefore, you decide not to increase your marketing budget. This is an example of how an inaccurate financial picture will impair your ability to make the right business decisions. Hence, don’t mix personal expenses with business expenses to inflate the total expense.
2. Problems with IRS audits
Of course, the most serious consequence of mixing personal expenses and business expenses is getting audited by the IRS. It is no joke that the IRS will audit your accounting books for the past three years or more if they really want to. The amount of time and human resources you need to allocate to prepare for an IRS audit is not worth the headache. You might as well do things right from the beginning.
How to fix the mistake
1. Hand pick the expenses that don’t belong to your business
Yes, unfortunately, you will have to go through the transactions one-by-one and remove any personal expenses from your company accounting book.
2. Unlink the credit or debit card that should only be for personal use
Once you delete all the personal transactions on your company accounting book, you also want to unlink your personal credit or debit card from company accounting software such as QuickBooks and Xero. Going forward, you will need to reimburse yourself on any expenses you paid out of your own pocket for the company.
What to do in the future to not mix personal expenses with business expenses
1. Use company cards only for company expenses
Easy enough, right? Let’s getting into the habit of using company credit and debit cards only for company expenses.
2. Set up an easier reimbursement system
If your concern was that the reimbursement process took too long and it was not easy for you to track your out-of-pocket expenses for the company, try the app Expensify. This app simplifies the reimbursement process and helps you get your reimbursement back faster.
Conclusion
Now you know why you don’t want to mix personal expenses with business expenses, how to fix the mistakes if you have already mixed all your expenses, and also what you need to do in the future to keep personal expenses separate from business expenses. We hope you feel much more comfortable on the reimbursement process and have more time to focus on running your business.
As always, reach out to us if you have any questions.
